Understanding Subsidiaries

By Lia Kopin-Green
/
January 18, 2023

A subsidiary is a company that is legally owned by another company, known as a holding or parent company. All decisions regarding the subsidiary are made by the parent company; however the stock distribution is allocated based on how much percentage of the subsidiary is owned. As a result, if the parent and subsidiary have a disagreement, the parent company can make their own decision unilaterally on behalf of the company. A board of directors is generally elected by the parent company to oversee the subsidiary's business operations and make decisions on its behalf.

In this article, we will review some of the main elements of a subsidiary such as its benefits, disadvantages, legality, and examples.

Relationship Between Subsidiaries and Holding Companies 

By forming a subsidiary, you are essentially creating a new business entity. In business law, it is important to understand that different business entities have different rules and regulations that govern their operations.

The main difference between a subsidiary and a parent company is that the subsidiary has its own assets, liabilities, and staff. The subsidiary is legally independent from the parent company and may have its own Board of Directors. Nonetheless, it still reports to the parent company regularly. 

The Structure of a Subsidiary 

The structure of a subsidiary company is much like that of a parent or holding company. The parent company can provide capital and expertise to the subsidiary, which in turn develops and runs its own business. Ultimately, the parent company has the ability to provide financial support and benefit from the profit generated by the subsidiary. A subsidiary also has its own sales and marketing team to build up customer bases, although it will always be affiliated with the parent company in some way.

It should also be noted that a company's ownership percentage in another business determines whether it will become an associate company, a passive investment, or a subsidiary. Ownership that exceeds 50% deems the company a subsidiary, while less than 50% makes it an associate or a minority investor. This concept can become rather complex when multiple subsidiaries or holding companies are involved. Therefore, you should seek the support of a business attorney in these matters.

Benefits of Subsidiaries

There are many reasons why a company may choose to establish a subsidiary. Here are a few examples of the main advantages to working with subsidiaries:

  • Expanding your company's reach in new markets
  • They are generally simple to establish, depending on the size of the company
  • Offsetting risk on your balance sheet by spreading it over multiple investments
  • Being able to help employees understand the business better, which may lead to higher productivity
  • Keeping more of your profits in the location in which they are earned

Potential Disadvantages of Subsidiaries

Nonetheless, it is crucial to keep in mind that subsidiaries have a few potential downfalls, including:

  • Subsidiaries can be expensive to operate
  • They may have legal issues that need to be addressed by your parent company
  • You may have trouble communicating with the subsidiary's management team
  • Conflict due to issues in chain of command between the parent company and subsidiary
  • There is increased liability involved since the parent company is responsible for the actions of the subsidiary

Examples of Subsidiaries 

Subsidiaries apply to a number of different business situations. It might be beneficial for a corporation to break up into smaller pieces in order to benefit from certain advantages such as lower taxes or fewer regulations. Moreover, there might be a lack of demand for a certain product or product in a current country. The parent country can increase their return on investment by establishing a subsidiary abroad and moving their focus abroad.

Take a look at Amazon, one of the biggest companies in today’s world, to understand the benefits of subsidiaries in today’s market. Amazon has utilized subsidiaries and acquiring companies in a number of different sectors to expand their global economic impact on the world. Some of the companies that lie under the Amazon umbrella include Twitch, IMDB and Whole Foods Market. 

Facebook is another common example of a holding company with multiple investment portfolios in other companies. Some of Facebook’s subsidiaries include Instagram LLC and WhatsApp Inc.

Bottom Line 

In conclusion, there are many reasons why setting up a subsidiary may be the optimal move for your company. However, it can be a complicated process for any individual or company to take on due to the complex legality surrounding subsidiaries and holding companies. The stress of dealing with these legal challenges can severely impact your daily business operations. This is why it is highly advised to consult with an experienced business attorney on these matters. Find a top tier lawyer today at Attorney at Law.

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