Subsidiary Definition, Meaning, Parent Company, & Holding Company

When a parent company owns over 80% of a subsidiary’s shares, consolidated financial statements provide a comprehensive view of both entities’ financial health. This practice enables the parent company to harness tax benefits and offset profits and losses between subsidiaries. Two or more subsidiaries primarily controlled by same entity/group are considered to be sister companies of each other.

• This autonomy extends to the ability of a subsidiary to sue and be sued independently, shielding the parent company from potential legal liabilities.
• 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.
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• A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own.
• From legal fees and compliance costs to operational expenses like office space and staffing, the financial investment can be significant.
• Buffett’s company also holds non-controlling shares of numerous companies, including Apple, Coca-Cola Co., Bank of America, and Kraft Heinz Co.
• For businesses planning long-term growth, foreign subsidiaries are a scalable solution.

If the parent company holds 100% of the equity the subsidiary is called a wholly-owned subsidiary. A subsidiary company is a company that is controlled and at least majority owned by another company. The company that controls the subsidiary is called a parent company or sometimes a holding company. Therefore, a subsidiary can require more paperwork and taxation and potentially faces more red tape than a single business.

What are the types of subsidiaries?

Subsidiaries operate as separate entities, holding liabilities, assets, and taxation responsibilities unique to their operations. This autonomy extends to the ability of a subsidiary to sue and be sued independently, shielding the parent company from potential legal liabilities. A parent company can make use of the equity method account when accounting for a majority-owned subsidiary, this method combines both companies’ financial data into a single statement. In combining the statements, it provides a more meaningful view of the company’s financial situation. There are cases like bankruptcy where it is best to not combine the majority-owned subsidiaries data into one set of statements. An affiliate, on the other hand, is a business whose parent company has between 20% and 50% ownership.

While the parent company may still influence the affiliate’s decisions, it does not have direct control over its operations. Subsidiaries may provide parent companies with a number of advantages, such as tax benefits, enhanced efficiency, greater diversification, and risk reduction as well as brand growth and recognition. It is also generally easier to create or acquire a subsidiary than it is to purchase or merge with another company.

How do parent companies benefit from the financial performance of their subsidiaries?

Like Berkshire Hathaway, Alphabet Inc. has many subsidiaries, the best known of which is Google. These separate business entities all perform unique operations intended to add value to Alphabet through diversification, revenue, earnings, and research and development (R&D). Start by evaluating whether a subsidiary is the right choice for your business. Consider factors like projected revenue, compliance requirements, and the level of control needed over local operations. Companies may need to contact local authorities, register and file documents, and obtain the necessary licenses and permits.

Key Benefits of Foreign Subsidiaries

A foreign subsidiary operates as a separate legal entity, which helps protect the parent company from certain liabilities. This separation reduces risk and ensures that financial, tax, and legal responsibilities are contained within the subsidiary’s jurisdiction, safeguarding the parent company’s assets. Yes, a subsidiary company is owned by another company, usually referred to as the parent or holding company. Ownership is established through the ownership of shares, with the parent company holding a majority stake (usually over 50%) in the subsidiary’s voting stock.

Are You Ready to Start Your Business?

• For businesses looking for flexibility or testing new markets, alternatives like an Employer of Record (EOR) or branch offices might be a better fit.
• Subsidiaries file separate tax returns and keep separate records for reporting purposes.
• Note that some states restrict ownership, prohibiting trusts from owning stock in a subsidiary.
• While a subsidiary may have its own business operations and perform certain activities, the parent company ultimately retains legal and financial responsibility for the subsidiary.
• It allows businesses to tailor their products or services to local customer preferences and build relationships with local partners, giving them a competitive edge.
• In the corporate world, a subsidiary is a company that belongs to another company, which is usually referred to as the parent company or holding company.

The parent company may be exposed to both financial risks and other liabilities from its subsidiaries. The consolidated financial statements of the holding company need to incorporate what is a subsidary all subsidiaries of the parent. All intragroup balances, transactions, income, and expenses are eliminated during consolidation.

Between state annual franchise taxes and annual registered agent fees, an LLC typically costs $400 per year to maintain. Instead, most subsidiaries are formed as Limited Liability Companies, or “LLCs”. Big and small businesses alike prefer using LLCs for their subsidiaries because of these benefits. Bank of America (BAC) still generates the majority of its revenue in its domestic market in the U.S. but its acquisition of Merrill Lynch allowed it to establish international operations. London-based Merrill Lynch International is one of Bank of America’s (BAC) largest operating subsidiaries outside the U.S. Merrill Lynch International serves customers worldwide and offers wealth management, research, analysis, fixed income, investment strategies, financial planning, and advisory services.

From entity setup and compliance management to financial reporting and operational support, we take care of the complexities so you can focus on growing your business. Whether you’re ready to establish a foreign subsidiary or need guidance on alternative solutions, our team of experts will tailor a strategy that works for your unique goals. Many countries require businesses to have a legal entity in place to hire employees, sign contracts, or conduct certain types of operations.