Lia Kopin-Green
February 14, 2023

What is a Subsidiary?

A subsidiary is a company that is legally owned by another company known as a holding company or parent company. All decisions regarding the subsidiary are made by the parent company. Nonetheless, the distribution of stocks is based on the percentage of ownership in the subsidiary. Consequently, if the parent and subsidiary have a disagreement, the parent company can make its own decision unilaterally on behalf of the company. In general, the parent company usually elects a board of directors to manage the subsidiary's operations and make decisions.

Key Takeaways

  • A subsidiary is a company owned by a holding or parent company, which makes all decisions regarding it.
  • The subsidiary is still considered a new business entity with its own assets, liabilities and staff.
  • A common example of a subsidiary structure is Amazon. Amazon is the parent company with subsidiaries such as Twitch, Internet Movie Database (IMDB) and Whole Foods Market.

Advantages of Subsidiaries

A company may opt to create a subsidiary for several reasons, some of which include the following advantages:

  • Diversification: Subsidiaries give companies the opportunity to diversify their operations into new geographical regions, products or services. This allows companies to expand their outreach and reduce the risk of over reliance on a particular product or region.
  • Tax Benefits: Since subsidiaries allow the parent company to transfer profits to a jurisdiction with lower tax rates, they may provide various tax benefits.
  • Limited/Contained Losses: Subsidiaries may contain, and even limit, liability problems for a parent company. In other words, the subsidiary can be used as a guard against financial losses or lawsuits to the parent company.
  • Investment Benefits: In some cases, subsidiaries may make investment processes simpler by reducing regulatory requirements. Moreover, subsidiaries can be used to attract additional investors to a certain business venture.

Disadvantages of Subsidiaries

On the other hand, there are a few potential downsides to starting a subsidiary company, including:

  • Complex Structure: Establishing a subsidiary may lead to a complicated legal structure within a company. This can result in increased costs, challenges in coordinating operations and management delays.
  • Communication Issues: In some situations, it may be difficult to maintain streamlined communication between a subsidiary and its parent company.
  • Increased Liability: The parent company generally owns a majority of a parent company, making it liable for all of the potential actions of the subsidiary. 
  • Regulatory Requirements: According to both state and federal laws, subsidiaries are subject to regulatory compliance. Fulfilling these requirements can require extensive expertise and resources.

Bottom Line

To summarize, creating a subsidiary can offer various advantages for a company, but the legal complexities involved can be a daunting task. Managing these challenges can also negatively impact the company's regular operations. Further, it is essential to note that subsidiaries may not be the suitable option for all types of business endeavors. As such, it is recommended to seek guidance from an experienced business attorney. Contact a top-tier lawyer today at Attorney at Law.

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