When a parent company has subsidiaries that are incorporated in another country, things can get a bit complicated. Generally, a subsidiary is required to conform to all the laws and regulations of the country where it’s incorporated and where it operates. This can mean that policies have to be adapted between the parent company and subsidiary to ensure compliance in all relevant countries. In some states, a subsidiary is only taxed on the profits it generated in that state, rather than the total profits of the parent company.
Forming a holding company along with its subsidiary companies is a very attractive option for investors in industries ranging from real estate to finance. To begin with, you must maintain separate financial records for your parent company and each of your subsidiaries. Transactions may take place within the corporate family, but each subsidiary will operate independently of the others. Furthermore, the way each subsidiary is managed may differ greatly, with various degrees of autonomy among them. When entering a foreign market, a parent company may be better off by putting up a regular subsidiary rather than any other type of entity. Even without any legal barriers to entry, creating a regular subsidiary helps the parent tap into partners who already have the expertise and familiarity needed to function with local conditions.
- There are, however, other ways that control can come about, and the exact rules both as to what control is needed, and how it is achieved, can be complex (see below).
- Two or more subsidiaries majority owned by the same parent company are called sister companies.
- In addition, lawyers or other experts must be consulted to advise and draft contracts.
- Subsidiary Companies maintain their own financial records and produce separate financial statements.
Subsidiaries and wholly-owned subsidiaries are companies that are at least partially under the control of another company. Both types of companies are owned by another entity, called the parent or holding company, but the owning company’s stake is different for each type. As such, there are no minority shareholders, and its stock is not traded publicly. Despite this, it still remains an independent legal body—a corporation with its own organized framework and administration. Unlike a regular subsidiary, which has its own management team, the day-to-day operations of this structure are likely directed entirely by the parent company.
For regulatory reasons, unconsolidated subsidiaries are generally those in which a parent company does not have a significant stake. Control can be direct (e.g., an ultimate parent company controls the first-tier subsidiary directly) or indirect (e.g., an ultimate parent company controls second and lower tiers of subsidiaries indirectly, through first-tier subsidiaries). Ownership of a subsidiary is usually achieved by owning a majority of its shares. This gives the parent the necessary votes to elect their nominees as directors of the subsidiary, and so exercise control.
Accounting and Taxes With Subsidiaries
The first and most obvious way is to acquire a controlling stake in an established company to sell its goods and services in the desired country. This involves creating a brand new subsidiary in another country from the ground up. This includes going through the regulatory process, building manufacturing facilities, and training employees in that market. However, given their controlling interest, parent companies often have considerable influence over their subsidiaries.
But subsidiaries often come with increased legal and accounting work, which can make things more complicated for the parent company. Since subsidiaries must remain independent to some degree, transactions with the parent may have to be “at arm’s length,” and the parent might not have all of the control it wishes. And while a subsidiary can help shield the parent company from certain legal problems, the parent may still be liable for criminal actions or corporate malfeasance by the subsidiary.
Wholly-Owned Subsidiary
Parent companies can benefit from owning subsidiaries because it can enable them to acquire and control companies that manufacture components needed for the production of their goods. This is especially true if the parent wants to get into another market, such as a different country. A subsidiary is a company that is completely or partially owned by another company. Acquiring and establishing subsidiaries is fairly common among publicly traded companies, especially in industries like tech and real estate. The advantages of these business structures include tax benefits, reduced risk, increased efficiencies, and diversification.
They—along with other subsidiary shareholders, if any—vote to elect a subsidiary company’s board of directors, and there may often be a board-member overlap between a subsidiary and its parent company. According to the law, holding company and subsidiary company are legally separate entities. This means that each company files its own parent and all subsidiaries together can be termed as tax return and is responsible for its debts.
This means getting approvals, building facilities, training employees, among other things. The other way is to make an acquisition of an existing company in the target market. The parent company is typically a larger business that retains control over more than one subsidiary. Parent companies may be more or less active with respect to their subsidiaries, but they always hold some degree of controlling interest. The amount of control the parent company exercises usually depends on the level of managing control the parent company awards to the subsidiary company management staff. Accounting standards generally require that public companies consolidate all majority-owned subsidiaries.
Advantages and disadvantages of a subsidiary company
The subsidiary company can then work independently on the further establishment of a brand or product line, whereby certain products achieve a higher level of awareness. A subsidiary company that belongs to a large group can concentrate completely on its core business area. In this way, more productivity is achieved than if this particular area were incorporated in the parent company. Certain business entities create separation between the business owner’s personal assets and the assets and liabilities of their business. This is referred to as a corporate veil and shields the business owner’s personal assets from liabilities arising out of their business’s activities.
Less risk for parent company
In these cases, the subsidiaries are referred to as sister companies to one another. For example, the Kellogg company owns a controlling interest (51% or more) in the Eggo company. General Re is a global reinsurance company whose North American history dates back to the early 1920s. The company became a direct reinsurer in 1929, offering its services directly and only to insurance companies. They can do this by setting up a new company (whether foreign or domestic) or by acquiring a company that’s already established in the target market. Buying an interest in a subsidiary usually requires a smaller investment on the part of the parent company than a merger would.
Distinct structures and company cultures may benefit certain markets or types of work, while they could be less successful in the parent company’s main market. A joint venture subsidiary has several advantages, including risk sharing, complementary strengths, local market access, cost sharing, resource efficiency, shared profits, and more. Whenever a company needs to diversify its commercial identity without jeopardizing its primary identity, it can consider forming a subsidiary. This is not uncommon with clothing companies that want to market different fashion labels, each having its own identity that is different than that of the parent company. A majority-owned subsidiary is one in which a parent company has a 51% to 99% controlling interest. Two or more subsidiaries majority owned by the same parent company are called sister companies.
- The difference between a joint venture (JV) and a wholly-owned subsidiary lies in their ownership structures.
- Many times, however, a parent company creates subsidiaries and keeps them separate entities for the purpose of limiting the liability of the parent company.
- This means that the parent/holding company and the subsidiary company both have their own set of financial statements.
- Through a joint venture, participating companies share ownership and decision-making responsibilities, including control over operations.
- It should also be noted that owning a subsidiary means a significant increase in the parent company’s legal costs.
- Subsidiaries can be the experimental ground for different organizational structures, manufacturing techniques, and types of products.
- The parent company holds a majority of the subsidiary’s voting stock or shares, giving it control over the subsidiary’s operations and management.
In addition, lawyers or other experts must be consulted to advise and draft contracts. Often these are founded by very large corporations in order to further expand the recognition of a certain brand. Holding companies are also created to hold assets such as intellectual property or trade secrets, that are protected from the operating company. On the other hand, decisions that need approval by the parent company need to work their way through two different chains of command, which can slow down the decision-making process at the daughter company. Warren Buffett’s Berkshire Hathaway Inc., for example, has a long and diverse list of subsidiary companies, including International Dairy Queen, Clayton Homes, Business Wire, GEICO, and Helzberg Diamonds. The Securities and Exchange Commission (SEC) states that only in rare cases, such as when a subsidiary is undergoing bankruptcy, should a majority-owned subsidiary not be consolidated.