What is a Subsidiary?
A subsidiary is a company that belongs partially or completely to a parent company or holding company. It’s a separate company from its parent or holding company, yet the parent or holding company exerts at least some influence over the subsidiary through at least 51% stock ownership, seats on the board of directors, and company decision-making.
Difference between wholly owned and partially controlled subsidiaries
Parent companies must have at least 51% ownership stake in a subsidiary. In these cases, the subsidiary is known as a partially controlled subsidiary. In cases when a controlling company owns 100% of the subsidiary’s stock, it’s known as a wholly owned subsidiary.
The company with full ownership or controlling interest in a subsidiary is known as a parent company if the parent company also carries out other business operations. A holding company is a company that exists for the sole purpose of owning subsidiaries.
How subsidiaries work
Subsidiaries can be structured as corporations, companies, limited liability companies, or even government or state entities, and they can have their own subsidiaries, as well. A subsidiary is a separate entity from its holding or parent company and operates as a distinct business.
Parent companies and their subsidiaries don’t have to operate in the same locations or industries. A subsidiary follows the laws and regulations of the country or state where it’s based and where it operates, regardless of where the parent company is incorporated.
Benefits of subsidiaries
Subsidiaries are advantageous for several reasons. Parent companies often create multiple subsidiaries in various industries or focused on distinct product or service lines for greater operational efficiency.
Assets and liabilities are separate from those of the parent company. While the parent company has partial or full control over the subsidiary, it’s not liable for the subsidiary’s losses, legal fees, or other liabilities. If a parent company owns or controls more than one subsidiary, those subsidiaries are also distinct from one another and protected from the other subsidiaries’ liabilities.
Subsidiaries also offer tax advantages for parent companies. Subsidiaries can reduce tax liability by taking advantage of deductions allowed by the state in which the subsidiary operates, for example. If a parent company has two or more subsidiaries and one has a loss in a tax year, the parent company can offset the gains made by another subsidiary with those losses.
On the downside, there are significant legal and accounting documentation requirements for subsidiaries. Issues can also arise with management control, particularly if other companies also have partial ownership of a subsidiary.
Examples of subsidiaries
Subsidiaries are quite common. Facebook is one well-known example of a parent company with investments in several subsidiaries, including Instagram, WhatsApp, and Facebook Technologies (formerly known as Oculus VR). Another example of a parent company is Amazon, which owns subsidiaries such as Whole Foods and Zappos, as well as Twitch, Audible, and IMDb.
Berkshire-Hathaway is a holding company that has hundreds of subsidiaries, including Geico, Dairy Queen, Business Wire, Fruit of the Loom, Duracell, and more. While Facebook tends to invest in subsidiaries in the social media and technology spaces, Berkshire-Hathaway’s subsidiaries span myriad industries.
Forming or investing in subsidiaries is a strategic move for some companies. It’s important to carefully assess both the advantages and disadvantages of a subsidiary before making a decision to form or acquire a subsidiary.