What is a subsidiary company? Definition, examples and FAQs
Leading international companies have created a collective of 370,000 subsidiaries, many of which operate in the U.S. Before you follow in their footsteps, you must understand not only what a subsidiary company is but also how to manage one effectively.
A subsidiary company is owned or controlled by a parent or holding company. Usually, the parent company will own more than 50% of the subsidiary company. This gives the parent organization the controlling share of the subsidiary. Sometimes, control is achieved simply by being the majority shareholder. When a parent organization owns all common stock of a company, it is known as a ‘wholly owned' subsidiary.
This guide will explain:
- What a subsidiary company is
- How a subsidiary company works
- Examples of subsidiary companies
- How entity management software can aid with corporation management
What is a subsidiary company?
Subsidiary definition: a company that is at least 50% owned by a parent or holding company.
A subsidiary company is either partially or wholly owned by another company. That company can be either a parent company, which is its own functioning company, or a holding company, which solely controls other companies and investments.
To be a subsidiary, a company has to be at least 50% owned by the parent or holding company. Subsidiaries 100% owned are considered wholly owned subsidiaries.
How a subsidiary company works
A subsidiary and parent company are legally separate entities. This means the individual organizations pay tax and debt, limiting shared liabilities between the companies. Subsidiary companies will have independence from the parent company and, in many cases, are individual brands. However, the parent company will naturally influence the subsidiary’s operations, including governance. The parent company can elect the board of directors as the major shareholder and drive the overall business strategy.
Subsidiaries are a commonly used structure for both national and international corporations. Tiers of subsidiaries group a range of industries within a multinational conglomerate. The structure can also bring together companies from within one sector in a corporate group.
How does a parent company control its subsidiary?
A parent company controls its subsidiary by owning all or most of its stocks. If that’s the case, the parent company can control most subsidiary operations, including assigning the board members.
The parent company can also include clauses in the subsidiary’s Articles of Incorporation to assign certain powers, such as requiring the parent company’s approval to pass bylaw changes or take certain actions.
That said, parent companies reap the benefits of subsidiaries when the subsidiary can operate more independently. This allows the subsidiary to set its own corporate strategy and objectives, which often significantly differ from that of the parent company.
Can a subsidiary be liable for a parent company?
Typically, a subsidiary cannot be liable for a parent company. Because they’re legally separate entities, they retain their own liability — meaning the parent company usually isn’t liable for the subsidiary’s actions either.
Can a subsidiary leave a parent company?
A subsidiary can leave a parent company, but the structure of the subsidiary/parent company relationship makes this uncommon. To leave the parent company, the subsidiary’s shareholders and board of directors would have to approve it. However, the parent company is among the shareholders — and, sometimes, the only shareholder — so it’s unlikely that a vote to leave the parent company would pass.
Can a subsidiary sue a parent company?
A subsidiary can sue a parent company, but it’s exceedingly rare and depends on the subsidiary’s Articles of Incorporation. To sue, the subsidiary has to prove damages due to the parent company — a difficult thing to do because the parent company owns the subsidiary. However, it’s still possible to sue if the parent company’s actions directly interfered with the subsidiary’s contractual obligations and the subsidiary suffered damages as a result.
Who owns a subsidiary company?
Subsidiary companies will be owned by either a parent company or a holding corporation. A wholly-owned subsidiary company will be entirely owned by the parent or holding corporation. In other cases, parent companies will have the controlling share of a subsidiary company. In practice, this means owning more than half of a company’s common stock. So, by definition, parent companies have majority ownership or control of a subsidiary.
As the major shareholder, parent companies will have the deciding vote when electing the directors in the boardroom. In many cases, a member sits on the board of both the parent and subsidiary company. Because of this, parent companies will significantly influence the strategic direction of subsidiaries, including any steering committee groups.
Types of subsidiary companies
There are two types of subsidiary companies: wholly owned and partially owned. The primary difference lies in the ownership stake of the parent or holding company.
Wholly-owned subsidiary: A wholly-owned subsidiary is 100% owned by the parent corporation. The parent company holds all common stock, which means they have sole influence over the subsidiary’s operations. This is generally achieved through a parent company acquiring full control of a company or by founding the subsidiary company itself. The wholly-owned subsidiary company is still legally recognized as its own entity.
Normal/partially-owned subsidiary: A normal subsidiary is when a parent or holding corporation owns more than half of the common stock. This means the subsidiary will have multiple shareholders who can influence the corporation’s ongoing operations.
What is the purpose of a subsidiary company?
The main benefit of subsidiary companies is that they are different legal entities from their parent company. This means the two companies can limit shared liabilities or obligations and will be separate in terms of regulation or tax. This legally recognized separation is a key difference between a branch and a subsidiary company.
Some other common reasons parent companies also use subsidiaries for the following purposes:
- Legal and financial liability: In practice, having two distinct legal entities limits the liability of both the parent and subsidiary company. Keeping companies separate can help to insulate the holding company from potential financial or legal issues faced by a subsidiary company.
- Regulatory compliance: In the case of multinational corporations, subsidiary companies will align themselves with local regulations or laws
- As an incorporated company in its own right, a subsidiary company can take advantage of more favorable corporate tax rates compared to where the parent company is based. This is a key part of good governance between parent companies and subsidiaries.
- Expand in new markets: Subsidiary companies are a common way for corporations to expand into international markets. As independent entities, the risk for the wider corporation is minimized.
- Utilize more flexible operations: Subsidiary companies are often distinct brands positioned under an overall holding company. These brands can benefit from the synergy between different parts of the larger corporate group but also retain the benefit of independence. Subsidiaries can be experimental brands or products, as financial liabilities are contained. As separate legal entities, subsidiary companies are more straightforward to manage or sell to.
- Leverage diverse expertise: Instead of investing heavily in internal research and development, parent companies often acquire companies with specific area expertise. An example would be a larger company purchasing a small firm that produces a specific technology or digital tool. Subsidiary companies allow parent corporations to diversify their business but isolate the potential risks.
- Tax advantages: Subsidiaries have the potential for favorable tax rates due to their separate setting from the parent company.
- Limited liability: Allows limited financial liability for the wider holding corporation, containing potential losses within the subsidiary company.
- Greater independence for brands: Keep a specific brand or product as its own legal entity to maintain independence and make selling straightforward.
- Develop niches: Subsidiaries focusing on specific product or technology development can strengthen the corporation as a whole.
Pros and cons of a subsidiary company
A subsidiary company may sound like a win-win. While it’s true that they shelter the parent from liabilities, offer tax benefits and facilitate growth, they also greatly complicate the corporate structure. Corporations considering a subsidiary should consider both the pros and cons of a subsidiary structure before moving forward.
|Tax benefits: Subsidiaries may only have to pay taxes in their state or country and not on all of their profits.
|Complex finances: Accounting can be complicated, especially when a parent company owns multiple subsidiaries.
|Shield for losses: Any losses are contained within the subsidiary and do not directly affect the parent/holding company.
|Exposure to liability: Parent companies are legally responsible for the actions of the subsidiary.
|Greater efficiencies: The subsidiaries of a parent company can work together to streamline processes or share their expertise.
|More legal ground to cover: While subsidiaries can shield losses, they can also be subject to different laws and regulations from their parent company depending on where they operate.
|Simple structure: Subsidiaries are easy to establish, manage and sell.
|Complex power dynamic: Subsidiaries are beholden to their parent company, but they have their own executive structure that can create conflicts.
Examples of subsidiary companies
Many modern businesses have subsidiaries; some offer liability protection, while others allow the parent company to reach new industries or territories. For example, PepsiCo isn’t just a company; it’s a conglomerate that owns more than one subsidiary company, including Mountain Dew, Frito-Lay and even Quaker Foods.
More common examples of subsidiary companies include:
|List of subsidiaries
|TJX Companies Subsidiaries
|T.J. Maxx Marshall’s HomeGoods Sierra HomeSense Winners T.K. Maxx
|Coca Cola Company Subsidiaries
|AdeS soy-based beverages AHA sparkling waters Aquarius Ayataka green tea Chivita Ciel water Coca-Cola brands Costa Coffee Dasani waters Del Valle juices and nectars Fairlife Fanta Fresca and Fresca Mixed Coctails Fuze Tea Georgia coffee Gold Peak teas and coffees Honest Kids ILOHAS innocent smoothies and juices Jack Daniel's and Coca-Cola Minute Maid juices Peace Tea Powerade sports drinks Simply juices and Simply Spiked adult beverages Schweppes smartwater Sprite Topo Chico waters and hard seltzers vitaminwater
|Estée Lauder Companies Subsidiaries
|Aerin Aramis Aveda Bobbi Brown Bumble and bumble Clinique Darphin Paris Dr. Jart Frederic Malle Editions de Parfums Estee Lauder GlamGlow Jo Malone London Kilian Paris La Mer Lab Series Le Labo Mac Origins Smashbox Tom Ford Beauty Too Faced
|Hyundai Motor Company Subsidiaries
|Hyundai Kia GENESIS Hyundai Mobis Hyundia KEFICO Corporation Hyundia MSEAT Hyundia WIA Hyundia TRANSIS Hyundia PARTECS Hyundia IHL Hyundai Steel Companyl Hyundai BNG Steel Hyundai Special Steel Hyundai Engineering & Construction Hyundai Engineering Co.,Ltd Hyundai Engineering & Steel Industries Co.,Ltd Hyundai City Corporation Hyundai GLOVIS Hyundai Rotem Hyundai Card Hyundai Capital Hyundai Commercial Hyundai Motor Securities Innocean Worldwide Haevichi Hotel & Resort Hyundai AutoEver Hyundai NGV GIT Hyundai Farm Land & Development Company
How to find subsidiaries of a company
The Securities and Exchange Commission (SEC) requires publicly listed companies to disclose their subsidiaries, including when they acquire or dispose of a subsidiary. As a result, this information is publicly available, and you can find the subsidiaries of a company if you know where to look.
A company’s subsidiaries are usually listed on:
- The company website: Annual reports are a hotspot for lists of subsidiaries. You can also check press releases, as a company will likely mention subsidiary updates there.
The SEC website: You can search and download documents from the EDGAR database, including registration statements and other forms. These forms usually include subsidiary information.
How to create a subsidiary company
A parent company can either create a subsidiary company or purchase the majority shares in an existing company. If founding a new subsidiary, parent companies will need to:
- Authorize the subsidiary: The parent company’s board of directors will vote to form the subsidiary company. This should include a resolution about the agreement signed by the board chair.
- Determine the structure: A subsidiary company can follow a corporate or LLC structure since both limit liability. Both are taxed differently, so the parent company should choose a structure that benefits their finances.
- Complete the process of incorporation: As with the creation of any new company, the parent company needs to register the subsidiary within the state or country where it intends to establish it. The parent company will be recorded as the owner of the subsidiary during the incorporation process.
- Fund the subsidiary: Like any new business, subsidiaries need capital. A parent company can transfer assets to the subsidiary, making the parent company the owner.
- Define operations: Parent companies need to organize how the subsidiary company will operate. This includes everything from appointing the board of directors to establishing a governance framework to deciding how the subsidiary will make critical decisions.
- Elect a board of directors: As the majority owners, a parent corporation will elect the subsidiary’s board of directors, including the chairman of the board. In many cases, certain members will sit on the board of both the parent and subsidiary companies. They can help to represent the wider group’s interests when making strategic decisions.
- Produce ongoing documentation: As a legally separate entity, subsidiaries function as normal independent companies. They will produce their own independent financial statements. Parent companies must record all transactions between themselves and the subsidiary. Parent companies are also required to include financial statements from their subsidiary companies within a consolidated financial document. Corporate documentation is vital across the whole business life cycle, from initial incorporation until the potential closure of a subsidiary.
Effectively create and manage your subsidiaries
Managing the boardroom and operations of one subsidiary company can be complex, let alone multiple subsidiaries. Simplify the process with entity management software. With the right solution, you can improve your efficiency, streamline your business intelligence and ultimately create a centralized corporate record to help you make more strategic decisions about your subsidiaries.
Diligent Entity Management tracks governance decisions, regulatory compliance and financial records in one easy-to-access dashboard. Analyze subsidiary information from your entire corporation group in real-time.
Find out how Diligent Entity Management can help your corporation. Request a demo from the team today.
Frequently asked questions (FAQs)
Is a subsidiary an LLC or a corporation?
A subsidiary company can be either an LLC or a corporation. The parent company will decide which structure the subsidiary will take. This is usually a financial and legal decision. While both LLCs and corporations limit liability, they are taxed differently.
Are subsidiaries 100% owned?
Subsidiaries can be both wholly-owned (100% owned) or not-wholly-owned. A parent company only needs to own more than 50% of another company’s stock for that company to be considered a subsidiary.
Is a subsidiary its own company?
Yes. Subsidiaries typically operate on their own and follow their own structure, but they benefit from the resources and connection to their parent company.
What are tiered subsidiaries?
There can be multiple layers or tiers of subsidiary companies within a wider corporate group. A company owned by a parent corporation is a first-tier subsidiary. But this subsidiary company may hold majority shares of a subsidiary company of its own. The second subsidiary company can be described as a second-tier subsidiary of the overall parent corporation. The tiers can continue depending on the complexity of the corporate group.
The parent company will have a degree of control over both tiers of subsidiary companies. As the major shareholder, it will hold direct control of a first-tier subsidiary. It can elect the board of directors and influence strategic business decisions when required. Using this influence, the parent company can exercise indirect control of the second-tier subsidiary.
What is a wholly-owned subsidiary company?
If the entire subsidiary company is owned by the parent corporation, this is known as a wholly owned subsidiary. A wholly-owned subsidiary company has no other shareholders. This gives the parent corporation a major influence on the company’s ongoing operations. Direct control of who sits on the board of directors helps define the aims and strategic decisions made by the subsidiary company.
What is an associate company?
When a corporation owns a minor share of another business, the company is known as an associate or affiliated company. In this case, a corporation owns a portion of a company but not enough to have full ownership. Usually, this is when a parent corporation owns less than half of a company's common shares. To be considered a subsidiary, the parent corporation would need to own the majority of the company.
With a minority share of common stock, a parent corporation will have no direct control over strategic decisions. In most cases, a larger company will invest in a smaller associate company. The parent company will usually record the value of this investment on its financial statements.
What are sister companies?
Sister companies are subsidiary companies that share a parent or holding company. Most sister companies operate independently and have no relationship other than the owning corporation.
Does a subsidiary have its own CEO?
Subsidiaries do have their own CEO, management team and board of directors. The parent company does have sway over who holds those positions, though.