Subsidiary Companies: Business Expansion and Operational Autonomy
Welcome aboard the business expansion express! Today, we’re diving into the intriguing world of subsidiary companies. They are like the business Avengers with a unique superpower contributing to the success of the parent company. A subsidiary company is a business entity 50% owned by a parent company. For example: Instagram is a part of the parent company Meta (formerly Facebook).
It is very crucial for everyone to understand the complexities of a subsidiary company in this dynamic landscape. This secondary company can act independently as well. There are also some solid reasons behind the creation of this company. Let’s delve into the core concepts of creating a subsidiary company:
What Is a Subsidiary Company?
A subsidiary company is a legally distinct entity majorly controlled by a parent company. This type of company has independence in conducting operations. But, they have to maintain a strategic alignment with the parent company. The perfect example of a subsidiary company is Nestlé Health Science. The giant company Nestlé expanded its reach into the health science sector by creating this subsidiary.
Each subsidiary serves a unique purpose under the umbrella of a larger corporate identity. This company is also independent in managing its liabilities and taxation. It is very important to note that the subsidiary has to follow the laws of the country where it is incorporated if a parent company owns it in a foreign land.
Purpose of a Subsidiary Company
There are different purposes for creating subsidiary companies. The prime reason is to boost business growth. Parent companies establish this separate entity to enter new geographic regions. It allows them to leverage their existing expertise while adapting to the specific demands of different markets.
Creating a subsidiary is the best way to manage risks. It allows a parent company to limit liabilities by separating the subsidiary’s operations. They can reduce costs by taking advantage of lower taxes and labor costs.
Ownership of a Subsidiary Company
The major ownership of the subsidiary companies lies with their parent companies. A parent company has control over decision-making processes. Also, it requires more than 50% of the subsidiary’s shares for control by means of the parent entity. It is essential to note that a subsidiary corporation can’t hold shares in its own company.
Distinction: Separate Companies
Legally, subsidiaries operate as separate entities. They are distinct from their parent companies. This separation extends to tax obligations and debt responsibilities. Overall, it means that subsidiaries are like siblings living in different houses. This relationship ensures alignment with overarching business objectives.
Wholly Owned vs Tiered Subsidiaries
A parent company has 100 % control over wholly owned subsidiaries. In contrast, the parent entity owns a tiered subsidiary less than 100%. Wholly owned subsidiaries provide unparalleled control but face challenges in achieving local autonomy.
Tiered subsidiaries offer a balance between control and operational independence. Wholly owned subsidiaries offer ultimate control, but tiered setups strike a balance between control and autonomy. It’s like choosing between being a solo rockstar or part of a legendary band.
Holding Company vs Parent Company
There are some differences between holding companies and parent companies. A holding company primarily holds assets, including subsidiaries. They have a high level of control over various businesses without directly participating in their operational activities. In this way, the company gets advantages in terms of financial control, and tax planning.
Then, a parent company participates in managing its subsidiaries. They are also active in the operations of its subsidiary. Only parent entity can take important decisions for their secondary companies.
How to Form a Subsidiary Company?
A parent company has to follow a process to create a subsidiary company. This process involves some legal steps. Below, we have mentioned the complete process of creating a subsidiary in India:
1. Choosing a Company Name
Parent companies choose a unique name for their subsidiary companies. Then, they reserve the name with the Ministry of Corporate Affairs (MCA).
2. Filing Process and Recognition
Now, it is time to fill out important documents with relevant authorities. A discern entity is required to publish a Memorandum of Association with the Registrar of Companies (RoC). This record defines the goals for which the organization has been fashioned. Also, Articles of Association are necessary to register with ROC.
3. Permits and Local Regulations
A parent entity needs to get Permanent Account Number (PAN) to get necessary permits, Then, a Tax Deduction and Collection Account Number (TAN) is crucial for local regulations. After that, a bank account is crucial for the subsidiary company.
4. Appointing Directors and Officers
Now, it is the time to appoint directors and officers. They will manage the operations of the subsidiary company.
5. Submission of Business Application
The official inception of the subsidiary happens after the successful business application submission. The subsidiary should comply with the tax and regulatory obligations.
Advantages of Subsidiary Company
Parent companies enjoy various benefits after incorporating subsidiaries. Here are key advantages associated with having a subsidiary:
– Tax benefits
A parent company files for consolidated tax returns with their subsidiaries. It offset the profits of one subsidiary with the losses of another.
– Reduced Risk
Parent companies do not have to pay the debts of the subsidiary. The creditors can only sue the subsidiary If they go bankrupt. It is because a subsidiary is a separate prison entity from its discern enterprise.
– Increased Efficiencies
A subsidiary operates independently from its parent organization. Also, all subsidiaries can work together. It helps in streamlining processes. Subsidiaries can share their expertise with each other.
– Diversification
A subsidiary helps the parent company diversify its portfolio. In this way, a parent entity enters new markets. Now, parent companies do not need to depend on a single source of revenue.
Disdvantages of Subsidiary Company
Parent companies face some disadvantages of having a subsidiary company. Below, we have mentioned the disadvantages of a subsidiary:
Limited Control
A parent enterprise does not have full control over the operations of its subsidiary. It takes place if a figure entity does now not own 100% of its shares.
Increased Bureaucracy
A subsidiary has to comply with the guidelines of its discerning employer. This can boost the executive and legal fees of running a subsidiary.
Legal Costs
A subsidiary exposes the determined employer to criminal dangers and liabilities. The figure entity faces court cases, fines, or sanctions if its subsidiary violates any law.
Examples of Subsidiary Companies
Many agencies offer a wide variety of products because of their subsidiaries. There are many agencies which are achieving new clients via their subsidiary corporations. Let’s have a look at a few examples of those businesses:
– Apple Inc
Apple Inc is the maker of the iPhone devices. Also, this company owns exclusive subsidiaries. Beats Electronics is a subsidiary agency of Apple. They make headphones, audio system, and track streaming offerings. Apple managed to take advantage of access to Beats’ loyal consumer base.
– Walmart Inc.
Walmart Inc is the world’s largest retailer, with over 11,000 shops in 27 nations. It additionally has a sturdy online presence due to its received subsidiaries. One subsidiary is Flipkart, an e-trade organization based totally in India. Walmart bought a 77% stake in Flipkart in 2018 for $sixteen billion. Now, Flipkart is the biggest e-commerce acquisition ever.
Using Financial Management Software Tools
There are financial management software tools available that helps in managing multiple legal entities. These tools help you create separate legal entities with ease. A team is appointed to handle everything from incorporation to accounting. This technology provides the financial expertise and support you need to manage your subsidiaries effectively. Financial management software offers you the following services and features:
- Incorporation and registration of your subsidiaries in the US or abroad
- Bookkeeping and accounting for each subsidiary, including tax preparation and filing
- Reporting and analysis of your consolidated and individual financial statements
- Dashboard and alerts to monitor the performance and compliance of each subsidiary
- Advisory and consulting on financial strategy and optimization for each subsidiary
Frequently Asked Questions (FAQs)
Q1. What is the difference between a subsidiary and a corporation?
An organization has its very own legal identification. Also, it may very own property and enter into contracts. A subsidiary is an awesome legal entity managed by way of a determined business enterprise.
Q2. Does subsidiary mean ownership?
Yes, a subsidiary approach ownership. The determine organization commonly owns greater than 50% of the subsidiary’s shares. Ownership is determined by means of the proportion of shares held through the determine agency.
Q3. Is a subsidiary a private company?
Subsidiaries can be non-public or public entities. It depends on their possession structure and regulatory requirements. A non-public subsidiary is one this is totally owned through the figure company and does not change its shares on the stock marketplace. A public subsidiary is one that is partially owned by way of the discerning organization and troubles its personal stocks to the general public.
Q4. Is a subsidiary the same as a shareholder?
No, a subsidiary is a separate entity managed by means of the usage of every one-of-a-kind entity, whilst a shareholder is someone or entity proudly owning stocks in a company. A shareholder has the right to accumulate dividends, vote on corporation topics, and sell or switch their stocks. A subsidiary is chargeable for following the business enterprise’s policies and reporting its monetary performance.
