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A subsidiary company is a company that is more than 50% owned by another company, called the parent company or holding company. As the subsidiary firm is a wholly-owned subsidiary of the parent company, the parent company can direct and control its choices and activities.
Even so, the subsidiary business continues to be a distinct legal entity from the parent business, with its own resources, obligations, taxes, and rules of operation. In contrast to its parent company, the subsidiary business may operate in a separate region or sector.
There are many reasons why companies may choose to have subsidiaries. Some of them are:
- Tax benefits: The costs or losses experienced by a parent company's subsidiaries can be subtracted from the parent company's tax liability. In the many jurisdictions where its subsidiaries operate, it can also benefit from various tax rates or incentives.
- Risk reduction: By separating them from its subsidiaries, a parent company can reduce the risk of legal or financial liability. The assets or reputation of the parent firm might not be impacted, for instance, if a subsidiary declares bankruptcy or is sued.
- Increased efficiencies and diversification: The division of a major corporation into smaller, more manageable units can help a parent business increase operational efficiency. It may also build or buy subsidiaries in various areas or industries to diversify its offerings of goods or services.
However, having subsidiaries also comes with some drawbacks. Some of them are:
- Limited control: Subsidiaries that are partially owned by other shareholders or have their own boards of directors may present managerial issues to the parent firm. When making choices involving its subsidiaries, the parent business may additionally have to cope with red tape and delays.
- Legal costs: By establishing or dissolving a subsidiary, a parent business may have to pay additional legal fees. In addition, depending on where its subsidiaries operate, it may need to abide by various rules and regulations.
