Menu
sharewise sharewise
Log in
Sign up
Log in
Sign up
Microsoft strongly encourages users to switch to a different browser than Internet Explorer as it no longer meets modern web and security standards. Therefore we cannot guarantee that our site fully works in Internet Explorer. You can use Chrome or Firefox instead.

Dictionary

What is a Subsidiary?

A subsidiary is a company that is fully or partially owned by another business entity known as the parent company or holding company. The parent company is deemed to have control over the subsidiary when it owns more than 50% of the latter's voting stock. This control provides the parent company with the ability to oversee the subsidiary's operations, policies, and management decisions. Subsidiaries are often used to diversify business operations while maintaining a legal separation between the parent company and specific ventures.

Reasons for Developing Subsidiaries

There could be a multitude of reasons a company might choose to develop or acquire a subsidiary. Some of these reasons include:

  1. Diversification: By creating or acquiring a subsidiary, a company can expand its product or service offerings and enter new markets. This diversification helps reduce risk and enables a company to generate new revenue streams.

  2. Risk Management: Subsidiaries offer a degree of legal separation between the parent company and the subsidiary’s operations. This separation can limit the exposure of the parent company to any legal, financial, or regulatory issues that may arise within the subsidiary.

  3. Operational Efficiency: A company can benefit from creating a subsidiary to streamline specific aspects of its operations, such as manufacturing, distribution, or research and development. This separation allows the subsidiary to focus on its core competencies while leveraging the resources and support of its parent company.

  4. Tax Benefits: By having a subsidiary in a different country or jurisdiction, a company can potentially take advantage of different tax laws or treaties. This can result in tax savings and increased financial efficiency for the company.

The Relationship between Parent Company and Subsidiary

While the parent company holds a controlling interest in a subsidiary, it is crucial to maintain a distinction between the two entities. This distinction is essential to limit legal, financial and regulatory liabilities that could impact the parent company. Some of the notable aspects of the relationship between a parent company and its subsidiary include:

  • Management: Although the parent company has control over the decisions and operations of its subsidiary, in many cases, the subsidiary will have its own management team. This team is responsible for the day-to-day operations and for implementing the strategies and goals set forth by the parent company.

  • Financial Statements: A subsidiary's financial information might be reported either independently or consolidated with the parent company's financial statements. Consolidation occurs when the parent company's financial statements include the assets, liabilities, and financial activities of its subsidiaries.

  • Legal Separation: Despite being under the control of a parent company, subsidiaries are often formed as separate legal entities. This setup builds a layer of protection for the parent company, as it limits the extent to which the parent can be held responsible for any potential liabilities of the subsidiary.

Types of Subsidiaries

There are different forms that a subsidiary can take, based on the ownership structure and the relationship to the parent company. Some common types of subsidiaries include:

  1. Wholly-Owned Subsidiary: When the parent company owns 100% of the subsidiary's outstanding shares, the subsidiary is considered as wholly-owned. The parent company has complete control in this situation and can make all decisions regarding the subsidiary's operations and management.

  2. Majority-Owned Subsidiary: This type of subsidiary is characterized by the parent company owning more than 50% of the voting shares, therefore having controlling power. Nonetheless, minority shareholders may still have influence over the subsidiary's decisions and can voice their opinions during shareholder meetings.

  3. Minority-Owned Subsidiary: In this situation, the parent company holds less than 50% of the subsidiary's voting shares, limiting its control of the subsidiary. The subsidiary is generally considered an "affiliated" company as opposed to a true subsidiary in this arrangement.

Conclusion

In summary, a subsidiary is a company that is owned or controlled to some extent by another entity known as the parent company. By developing or acquiring a subsidiary, a parent company can achieve strategic diversification, manage risks, increase efficiency, and take advantage of tax benefits. The relationship between a parent company and its subsidiary allows for varying degrees of control, depending on the ownership structure. Recognizing the various types and advantages of subsidiaries is essential for understanding business expansion strategies and the potential risks associated with them.

Feedback