A Guide to Subsidiary Company: Definition, Examples and FAQs

This guide will:

• Define what a subsidiary company is
• Layout the different types of subsidiary company
• List the advantages and disadvantages of the subsidiary company structure
• Give real-world examples of subsidiary companies and their parents
• Explain how board management software like BoardCloud aids in the governance of subsidiary companies
• Answer some FAQs
• Run through the step-by-step process of forming a subsidiary company in the US. 

Definition of a subsidiary company

A subsidiary company is a company that is owned and controlled by another company, referred to as the parent or holding company. The parent company must own a controlling interest, a majority stake of 50% or more, of the subsidiary company’s stock. The subsidiary operates as an independent entity with its own management, assets and liabilities. However, the parent company is still able to exert significant control over the subsidiary's operations, management, and financial decisions.

Types of Subsidiary Company 

In the instance where the parent company owes 100% of the subsidiary company, it is referred to as a wholly owned subsidiary. Where the parent company owns less than 100% but more than 50% of the subsidiary company it is referred to as a partially-owned subsidiary.

Where the parent company is a minority shareholder in the other company, owns less than 50% of the company, the company is not a subsidiary but rather an affiliate company. A branch office is an extension of the parent company and is not a separate legal entity. 

Advantages and disadvantages of the subsidiary company business model 

Advantages of the subsidiary company business model. 

• They aid companies in their expansion into new markets as the subsidiary is more easily able to align itself with local regulations and local consumer habits. In some countries, it is a requirement that a subsidiary be incorporated in that country. 
• The structure helps the holding company to target new segments in new markets while allowing the holding company to maintain its core focus. 
• The formation of subsidiaries allows companies to diversify their interests. The subsidiary will often pursue more niche interests. 
• Aids in the maintenance of independent brands by keeping the parent and subsidiary companies operationally independent of one another.
• Risk management is a major benefit of such a structure as it limits the legal and financial liabilities of the holding company. As a distinct legal entity from the parent company, with its own management, assets and liabilities, the subsidiaries can isolate risk, shielding valuable intellectual property, real estate, or cash from liabilities. 
• Many companies create separate LLCs to hold real estate assets for liability protection. 
• The subsidiary maintains its own financial records. This helps monitor the subsidiary’s performance and aids in future planning.
• There are tax benefits as subsidiaries may often only be required to pay taxes determined by the state or country which they are incorporated in.  It is advised that you seek a tax professional knowledgeable of the tax regulations of the country or state to maintain proper compliance and take advantage of any tax benefits. 
• Shareholder approval is not required to purchase a subsidiary or to sell a subsidiary. This differentiates this structure from the merger where board approval is required and companies do not maintain separate management, accounts, and legal liability. 
• The subsidiary can take advantage of the synergies related to the holding company.

Disadvantages of the subsidiary company business model. 

• The process of consolidating the various subsidiaries' financials can complicate the financials of the holding company. U.S. companies must consolidate financial statements under GAAP or IFRS, which can be administratively intense.
• Although the holding company is to some extent shielded from legal liability the holding company may still be held liable in cases of criminal or corporate malfeasance by the subsidiary.  
• Subsidiaries as distinct legal entities are required to obtain their own permits and licences and registration and compliance, 
• In the instance of a partially owned subsidiary the parent company may not be able to exert control to the same extent as if merged or wholly-owned as the parent company may face pushback from minority shareholders.
• Governance Complexity: Managing compliance, HR, payroll, and tax across multiple states (or countries) can be resource-intensive.

Examples of subsidiary companies and their holding companies

How Subsidiaries Operate Within Corporate Governance

Subsidiary companies, like their parent companies, have a governance structure that is vital to their operations. This governance often involves a board of directors responsible for setting the company’s policies and ensuring that it complies with legal and regulatory requirements. 

For organizations managing multiple subsidiaries, a board portal software like BoardCloud becomes a critical tool for managing governance efficiently. With BoardCloud, parent companies can centralize their communications, securely manage board documents and streamline decision-making across all subsidiary companies. 

In summary, a subsidiary company is a distinct legal entity owned and controlled by a parent company, often used for strategic growth, risk management and tax optimization. Understanding the structure, governance and benefits of subsidiaries is essential for businesses looking to expand while protecting their assets. With the right tools, like BoardCloud’s board portal software, companies can manage their subsidiaries more effectively, ensuring seamless governance and operational success.

FAQs

Can a subsidiary company own another subsidiary Company? 

A subsidiary company may hold a majority of shares of a subsidiary company of its own. The second subsidiary company is then described as a second-tier subsidiary of the overall parent corporation. 

What is a Sister Company

A sister company refers to a company that shares the same parent company with another company. In other words, sister companies are subsidiaries of the same holding company or corporate group.

While they are separate, sister companies often collaborate to share resources or technologies. Marvel Film and LucasFilm are examples of sister companies. Both share the same parent, The Walt Disney Company. 

What is a conglomerate? 

A conglomerate is a large corporation that owns a collection of diverse businesses, often operating in completely unrelated industries, all under a single corporate umbrella. These businesses are typically structured as subsidiaries, and while they share a parent company, they function independently. 

An example is Berkshire Hathaway which owns multiple subsidiaries in a diverse set of industries spanning insurance, manufacturing, retail and services. 

Forming a Subsidiary Company in the US

Each state has its own requirements and regulations but the general outline of the steps required to form a subsidiary in the United States of America

Choose the form of Subsidiary

The subsidiary can take the form of a Corporation or a LLC (Limited Liability Company). LLCs are a common form of subsidiary companies as they are flexible, have fewer reporting requirements. 

Decide where to set-up your subsidiary

Some states such as Delaware have more developed business laws and corporate courts while other states may offer tax advantages. Sometimes it is easier to set-up in the state you are operating in for compliance reasons. 

Choose a Company Name

The name should be unique in that state. Remember to check that the relevant domain names are available for digital marketing and branding. 

File Paperwork 

File your articles of incorporation (corporation) or articles of organization (LLC) with the Secretary of State where you are filing. 

Appoint a registered agent

This is someone who can legally receive documents on behalf of the business. This can be a person in the state, a registered agent service or an attorney or accountant.  A physical address in the state is required. 

Get a EIN (Tax ID) from the IRS

An EIN number is required to open a bank account, hire employees, and file tax returns. You can apply for your EIN on the IRS website. 

Open a Bank Account

The bank will require: formation documents, EIN, proof of identity of the owners, and the operating agreement. 

Register for State and Local Taxes

These may include income taxes, sales taxes, payroll Taxes, and local licenses. It is advised to speak to a local accountant or tax professional as each locale will often have its own rules and regulations.