Leading international companies have created a collective 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?
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 are used to group a range of industries within a multinational conglomerate. The structure can also be used to bring together companies from within one sector in a corporate group.
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.
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 be aligned 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 too.
- 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
Examples of subsidiary companies
There are more subsidiary companies than you might expect. For example, PepsiCo isn’t just a company; it’s a conglomerate that owns many subsidiaries, such as Mountain Dew, Frito-Lay and even Quaker Foods.
More common examples of subsidiary companies include:
List of subsidiaries
AdeS soy-based beverages
AHA sparkling waters
Ayataka green tea
Del Valle juices and nectars
Fresca and Fresca Mixed Coctails
Gold Peak teas and coffees
innocent smoothies and juices
Jack Daniel's and Coca-Cola
Minute Maid juices
Powerade sports drinks
Simply juices and Simply Spiked adult beverages
Topo Chico waters and hard seltzers
Bumble and bumble
Frederic Malle Editions de Parfums
Jo Malone London
Tom Ford Beauty
Hyundia KEFICO Corporation
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 Motor Securities
Haevichi Hotel & Resort
Hyundai Farm Land & Development Company
Setting up 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 subsidiary will need to be registered within the state or country it is to be founded. 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 — that’s also what makes 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. All transactions between the parent company and subsidiary will need to be recorded. 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. This means all common stock is held by the parent company. 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.
In contrast, a normal subsidiary is usually when anything more than half of the common stock is owned by the parent or holding corporation. 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 a 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 value of this investment will usually be recorded on the parent company's financial statements.
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.