Subsidiary

A company owned but not necessarily operated by another company

What is a Subsidiary?

A subsidiary is a business entity that is fully owned or partially controlled by another company, termed as the parent or holding company.  Ownership is determined by the percentage of shares held by the parent company, usually at a stake of at least 51%.

What are the attributes of a Subsidiary?

A subsidiary operates as a separate and distinct business entity from its parent company.  This benefits the company for the purposes of taxation, regulation, and liability. The subsidiary can sue and be sued separately from its parent. Its obligations are also typically its own and are not usually a liability of the parent.

The minimum level of ownership of 51% guarantees the parent company the necessary votes to configure the subsidiary’s board. This allows the parent to exercise control in decision-making.

Parent and subsidiary companies need not operate in the same location, nor the same line of business. Subsidiaries may also have its own subsidiaries; the line of succession forms a corporate group with varying degrees of ownership

Advantages:

  • Tax benefits – a parent company can substantially reduce tax liability through deducations allowed by the state. For parent companies with multiple subsidiaries, the income liability from gains made by one subsidiary can often be often by loss in another.
  • Risk reduction – the parent-subsidiary framework mitigates risk because they create a separation of legal entities. Losses incurred by a subsidiary do not readily transfer to the parent. In case of bankruptcy, however, the subsidiary’s obligations may be assigned to the parent if it can be proven that the parent and subsidiary are legally one and the same.
  • Increased efficiencies and diversification – in some cases, creating subsidiary silos allows the parent company some form of operational efficiency, by splitting a large company into smaller, more manageable companies.

Disadvantages:

  • Limited Control – A parent may management control issues with its subsidiary if it is partly owned by other organizations. Decision-making can become also tedious and issues must be decided through the chain of command within the parent bureaucracy before action can be taken.
  • Lengthy and costly legal paperwork both in the formation of a subsidiary company and for filing tax benefits.

Example

One popular parent company in the digital industry is Facebook. Aside from being publicly traded in the open market, it also has multiple investment portfolios in other companies within the social media space and software technology making the following companies among its current subsidiaries:

  • Instagram – a photo-sharing site acquired by Facebook on April 2012 for approximately US$1B in cash and stock. Instagram remains separate in its operational management, being led by Kevin Systrom as CEO.
  • WhatsApp Inc. – Facebook acquired this popular messaging application for roughly US$19.3B in 2014. 7
  • Oculus VR LLC – In March 2014, Facebook agreed to buy Oculus shares worth $2B.