When it comes to the corporate world, the term “subsidiary” gets used a lot. And there are different types of subsidiaries, each with its purpose and definition. But the most common type of subsidiary is a wholly owned subsidiary.
A subsidiary is a company that is controlled by another company, which is known as the parent company. The parent company owns a majority stake in the subsidiary, and as a result, has ultimate control over its operations.
What is a Subsidiary?
A subsidiary is a business that is at least 51% owned or controlled by another company, known as the parent or holding company. The parent company has certain control over the subsidiary, but the subsidiary is still its legal entity. This relationship is also known as a parent-subsidiary relationship.
A subsidiary can also be owned 100% by the parent company, in which case it is known as a wholly owned subsidiary. In this case, the parent company has complete control over the subsidiary and its activities.
The parent company can have multiple subsidiaries, each with its management team and operations. The parent company may also have different ownership percentages in each subsidiary.
Why Do Companies Create Subsidiaries
There are a few reasons why companies might create subsidiaries:
- To operate in a new market: If a company wants to enter a new market, it might set up a subsidiary in that market. This allows the company to have a presence in the new market without fully committing to it.
- To protect the parent company: If the parent company is involved in a lawsuit or operating in a risky market, setting up a subsidiary can help protect the parent company from financial damage. In most cases, subsidiaries don’t have the same level of liability as the parent company so they can act as a buffer.
- To generate more income: A subsidiary can be used to generate more income for the parent company. For example, if a company owns a portfolio of patents, it might set up a subsidiary to license those patents to other companies.
- To manage risk: By spreading out its operations into different subsidiaries, a company can manage risks more effectively. If one subsidiary fails or even the parent company, the other subsidiaries can continue to operate.
- To save on taxes: In some cases, setting up a subsidiary in a different country can help a company save on taxes. This is because each subsidiary is a separate legal entity and may be subject to different tax laws.
Examples of Subsidiaries
Subsidiaries can be seen everywhere from manufacturing to retail. A good example would be Facebook, which owns several subsidiaries, including Instagram and WhatsApp.
Another example is Honda, which has multiple subsidiaries that focus on different aspects of the business, such as manufacturing, sales, and finance.
Apple would be a good example as well, as the company has multiple subsidiaries that focus on different product categories, such as the iPhone, iPad, iCloud, Mac, etc.
Conclusion
Subsidiaries are a common business structure used by companies to enter new markets, manage risk, and generate income. In most cases, a subsidiary is a separate legal entity from the parent company. Subsidiaries can be formed in different ways, including through mergers, acquisitions, or by establishing a new business. They are a great way to expand a company’s reach and operations without incurring the same level of risk as the parent company.
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