What Is A Subsidiary Company? Definition, Examples And FAQs

A subsidiary company is a business entity owned and controlled by another company, referred to as the parent company or holding company. The parent company usually holds a majority stake (more than 50%) in the subsidiary, which allows it to exert significant control over the subsidiary's operations, management, and financial decisions. However, the subsidiary operates as a distinct legal entity, separate from the parent company.

Characteristics of a Subsidiary Company

A subsidiary company has unique characteristics that distinguish it from other types of business structures:

1. Separate Legal Entity: Though owned by a parent company a subsidiary operates as an independent entity with its own management, assets and liabilities.

2. Liability Protection: One of the key benefits of a subsidiary structure is the separation of liabilities. If a subsidiary incurs debts or claims, the parent company is generally not liable, except in cases of fraudulent conduct or lack of separation between entities.

3. Financial Independence: A subsidiary company generally maintains its financial records and reports. Doing this allows for a more detailed analysis of financial performance and risk.

Types of Subsidiary Companies

1. Wholly-Owned Subsidiary: When a parent company owns 100% of a subsidiary’s shares, it’s known as a wholly-owned subsidiary. This allows the parent company to have full control whilst the subsidiary company remains a separate legal entity.

2. Partially-Owned Subsidiary: If a parent company owns less than 100% but more than 50% of the subsidiary’s shares, it is considered a partially-owned subsidiary. While the parent company retains significant control, minority shareholders also have a stake in the company and may influence decisions, depending on their voting rights.

Why Form a Subsidiary?

There are several reasons why a company may choose to create or acquire a subsidiary:

1. Strategic Expansion: Forming a subsidiary allows companies to expand into new markets or industries while managing risks. Subsidiary companies can be tailored to operate in specific geographic regions, target new customer segments, or diversify product lines.

2. Risk Management: By forming a subsidiary, companies can isolate and contain risks. 

3. Regulatory Requirements: In some industries or countries, regulatory laws may require a company for a local subsidiary to conduct business.

4. Improved Focus: A subsidiary allows a company to focus on specific goals or projects, which may differ from the core business of the parent company.

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 optimazation. 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.