Subsidiaries Definition & How Does a Subsidiary Company Work

The structure of the business world is an intricate and complex system.

When it comes to companies and brands, you could be forgiven for thinking that there are a huge number of independent companies.

Whilst that is true in a sense, a large percentage of companies will be owned by a separate company. These smaller companies are known as subsidiaries.

But what exactly is a subsidiary company? And how do they work?

We’ll take a closer look at the definition and give you some examples.

Here’s What We’ll Cover:

Definition of Subsidiary

How Does a Subsidiary Work?

Example of a Subsidiary Structure

The Advantages and Disadvantages of Subsidiaries

Key Takeaways

Definition of Subsidiary

In the business world, a subsidiary is a company that is either fully, or partially owned by another company. However, if it is only partly owned, it would have to be a majority hold.

The owning company is usually referred to as the parent company or the holding company.

To be a parent company, you have to have a controlling interest in the subsidiary company. This means it has or controls more than half, or at least 51%, of its stock.

If a subsidiary is completely owned by another firm, then the subsidiary is referred to as a wholly owned subsidiary.

How Does a Subsidiary Work?

To become a subsidiary, a parent company must purchase the controlling interest in the company’s share of stock.

In most cases, the subsidiary will continue to operate as a separate and distinct corporation after it has been purchased.

Becoming a subsidiary opens up a number of benefits when it comes to taxation, regulation and liability. For the parent company, their controlling share means that they can configure the subsidiary’s board of directors. This then allows the parent company to exercise control in the decision making of the company.

A parent company and subsidiary don’t necessarily have to be in the same location or even the same line of business. Subsidiaries can also have their own subsidiary companies.

How Does a Subsidiary Work?

To become a subsidiary, a parent company must purchase the controlling interest in the company’s share of stock.

In most cases, the subsidiary will continue to operate as a separate and distinct corporation after it has been purchased.

Becoming a subsidiary opens up a number of benefits when it comes to taxation, regulation and liability. For the parent company, their controlling share means that they can configure the subsidiary’s board of directors. This then allows the parent company to exercise control in the decision making of the company.

A parent company and subsidiary don’t necessarily have to be in the same location or even the same line of business. Subsidiaries can also have their own subsidiary companies.

One of the biggest and most relevant examples of a parent company owning subsidiaries is The Walt Disney Company. They have a diverse investment portfolio in other companies within media and entertainment.

Examples of subsidiary companies that The Walt Disney Company owns include:

• Pixar: Famed animation company Pixar was purchased by Disney in 2006 at a valuation of $7.4 billion.
• Lucasfilm: Disney acquired George Lucas’ company Lucasfilm in 2012 for $4.05 billion. With this purchase, they also gained the rights to the Star Wars franchise.
• Marvel Studios: In 2009, Disney purchased the blockbuster machine that is Marvel Entertainment for $4 billion.

These are just a tiny fraction of the companies that are owned by Disney. Check out this article for a full insight into the structure of The Walt Disney Company.

The Advantages and Disadvantages of Subsidiaries

Advantages

There are a number of strong advantages when it comes to subsidiaries. These may include:

1. Tax Benefits

A parent company can significantly reduce their tax liabilities. This is done through the deductions allowed by the state for owning a subsidiary.

For a parent company with a number of subsidiaries, the income liability from the gains made by one subsidiary can often be offset by the losses in another.

2. Diversification

Creating subsidiary companies can help a parent firm or company to achieve better operation efficiency. This is done by splitting a larger company into smaller, more manageable companies.

3. Risk Reduction

Having a subsidiary framework reduces risk because it creates a separation in terms of a legal entity.

A subsidiary can sue and be sued completely separately from the parent company. It’s obligations tend to be its own and therefore not usually counted as a liability of the holding company.

Disadvantages

1. Limited Control

It is sometimes the case that a subsidiary is a majority-owned subsidiary that is owned by a parent company, but also partly owned by other entities.

This creates a complicated situation where decision making becomes difficult. This is due to too many invested interests and a long chain of command.

2. Cost

Buying a company tends to be a costly process. There is lengthy and expensive legal paperwork that has to be completed before a company can be purchased.

Key Takeaways

There are a number of benefits to having a subsidiary as well as being one.

All of the most successful companies currently operating have a huge number of subsidiaries. This then enables them to have more control over their field’s market.

Are you looking for more business advice on everything from starting a new business to new business practices?

Then check out the FreshBooks Resource Hub.

---

RELATED ARTICLES