Subsidiary Definition

A subsidiary is a company that has been created by another company or corporation, called the parent. 

Subsidiaries are still legally separate from their parents but they tend to fall under the majority of control from their parents if not all of it. A subsidiary may also refer to a company’s business whose stock is controlled by another company.

Subsidiaries are often used to refer to parts of a larger organization or companies that are related in some other way to the main business, such as location or product.

Types of Subsidiaries

There are three types of subsidiaries: Wholly Owned Subsidiaries, Partly Owned Subsidiaries, and Joint Venture Subsidiaries.

Wholly Owned Subsidiaries

A wholly-owned subsidiary is 100 percent owned by the parent company that created it. The parent company has complete control over the subsidiary, including all board seats and voting rights.

Partly Owned Subsidiaries

A partly owned subsidiary is not completely controlled by its parent company. It usually has one to 49 percent ownership of its stock, but the parent company has the controlling votes in major decisions.

Joint Venture Subsidiaries

A joint venture subsidiary is created by two companies, each of which owns half of the subsidiary’s stock. Each parent company appoints only half of the board members and has one vote in major decisions. 

Why Do Companies Create Subsidiaries?

There are many reasons why companies create subsidiaries. Subsidiaries may be created to:

  1. Market a company’s products and services in other countries.
  2. Operate in particular industries where the parent already has strengths such as customer bases. Subsidiaries can also allow a business to diversify its portfolio by selling different kinds of products or services.
  3. Operate in different geographic areas so the parent company doesn’t have to have offices all over the world. Subsidiaries are great for expanding into new markets because the parent company has less risk.
  4. Take advantage of favorable tax laws in other countries where a subsidiary is located. Subsidiaries may be able to benefit from lower corporate tax rates or other benefits

How to Form Subsidiaries

To form a subsidiary, the parent company must incorporate in whatever state it chooses just as if it were a new business. 

It will have to meet all of the same requirements that a regular company does when forming – filing articles of incorporation, registering with your state’s Secretary of State, and applying for all necessary business licenses. 

It will also have to obtain any federal or state tax identification numbers that it may need for future reference.

Differences Between Subsidiary and Parent Company

A parent company is a corporation, sole proprietorship, limited liability partnership, or other entity that owns at least 50 percent of another business’s voting stock. 

Subsidiaries are separate entities from the parent company. Subsidiaries may have been created by a parent company to expand its business, but Subsidiaries operate independently from their parents and often have separate management teams. 

Subsidiaries can also be created instead of an expansion into new geographies or products.

How Subsidiaries Are Taxed

Subsidiaries are separate legal entities from their parents so they pay taxes on all of their income just as any other business would. Subsidiaries have to file separate tax returns with the IRS and keep separate records for reporting purposes. 

Subsidiaries do not share the same tax responsibilities as their parents. Subsidiaries are taxed on all of their income, not just the profits. Subsidiary stock dividends and capital gains also get taxed at separate rates than parent company stock. 

Advantages and Disadvantages of Subsidiary Companies

The advantages of Subsidiary Companies are as follows:

  • Subsidiaries are separate legal entities, so they can make decisions without needing to seek permission from the parent company every time.
  • Subsidiaries offer existing companies the chance to enter new markets or product lines without having to create a completely new business with employees and everything else that goes into it. 
  • Subsidiary companies can help the parent company cut costs by eliminating redundancies in overhead expenses. Subsidiaries can also take advantage of economies of scale to reduce their operating costs.
  • Subsidiaries are not directly affected by economic downturns, recessions, or market fluctuations because they operate separately from other components within the parent company.

The disadvantages of Subsidiary Companies are as follows:

  • A Subsidiary is a new company, so it requires a significant financial investment from the parent company at its formation. Subsidiaries also require additional investments as they grow and expand. 
  • Subsidiaries have separate management teams, so they may not be equipped to handle some of the demands of operating within an international business structure. 
  • Subsidiaries are separate legal entities so they have their own set of responsibilities and liabilities that are often more rigorous than those of a parent company. 
  • Subsidiaries will also be held responsible for any negligence or misconduct on their part, while the parent company will not be held responsible for Subsidiary actions.
  • Subsidiaries are taxed at a separate rate from their parents. Subsidiaries pay all federal taxes on the income they make in addition to state taxes and any other applicable fees or fines. 

Conclusion

In conclusion, Subsidiary Companies offer existing businesses a chance to enter new markets or product lines without having to create a completely new business structure from scratch. 

Subsidiaries allow parent companies to cut costs by eliminating redundancies in overhead expenses and taking advantage of economies of scale. 

Subsidiaries can also help the parent company to reach global markets with ease and adapt quickly to changes in the market.

A Subsidiary Company is a company that’s owned and operated by another business, or parent company.
Subsidiaries are separate legal entities from their parents, so Subsidiaries pay taxes on all of their income. Subsidiaries file separate tax returns and keep separate records for reporting purposes.
A Subsidiary is a separate business entity from its parent company, while a parent company owns Subsidiaries. They are owned in whole or part by their parent companies.
Although Subsidiaries are small businesses, Subsidiary Companies do not count as small business entities under the Small Business Association. Subsidiaries may still apply for loans and some government contracts on their merit.
Subsidiaries can be used to enter new markets, product lines, and countries without having to create a whole new business structure. Subsidiaries allow existing businesses to cut costs by eliminating redundancies in overhead.

Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

True Tamplin, BSc, CEPF®

About the Author
True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website, view his author profile on Amazon, or check out his speaker profile on the CFA Institute website.