Malcolm ZoppiTue Oct 24 2023

What Are Company Subsidiaries? Pros and Cons

It is essential to understand the legal entity status of subsidiary companies, as they are separate and distinct from their parent companies.

what are company subsidiaries

Company subsidiaries are a vital aspect of the corporate world, prevalent in many industries today. A subsidiary company is a separate and distinct business entity or corporation owned by another company, commonly referred to as the parent company or holding company. This means that a subsidiary is controlled by another company, which holds a majority of the subsidiary’s stock.

These entities have gained popularity due to their many advantages, such as providing a legal shield to the parent company, creating new business opportunities, reducing tax liabilities, and facilitating financial management at the subsidiary level. However, there are also disadvantages, such as challenges in governance by parent companies and the involvement of board of directors.

Seek advice from a commercial lawyer to understand the legal entity status of subsidiary companies, as they are separate and distinct from their parent companies. This means that they can file their financial statements, liabilities, and assets independently of their parent companies. 

In the following section, we will delve deeper into the characteristics and importance of company subsidiaries, including various types of subsidiary companies and how they work. We will also discuss the potential advantages and disadvantages of parent companies owning subsidiaries and examine real-life examples.

Key Takeaways

  • Company subsidiaries are separate and distinct business entities owned by a parent or holding company.
  • They are controlled by another company, which holds a majority of the subsidiary’s stock.
  • While there are advantages to owning a subsidiary, such as reduced tax liabilities and new business opportunities, there are also challenges, such as governance by parent companies.
  • Subsidiary companies are legal entities separate and distinct from their parent companies and can file financial statements independently.
  • Understanding the importance of company subsidiaries is vital for anyone looking to establish or work with a subsidiary company.

Characteristics and Importance of Company Subsidiaries

Company subsidiaries are separate and distinct businesses or corporations owned by another company, commonly referred to as the parent company or holding company. Starting a subsidiary involves setting up a new business entity that is partially or wholly owned by a parent company.

Subsidiary companies operate independently from their parent companies, with their own management structure, board of directors, and employees. The parent company provides financial and management support, but subsidiary companies typically have their own operations and revenue streams.

The benefits of creating a subsidiary company include diversification of revenue sources and access to new markets. Subsidiary companies can also enhance a parent company’s reputation and improve its overall financial performance.

Examples of subsidiary companies include Amazon’s subsidiary, Whole Foods Market, and Google’s subsidiary, YouTube. These subsidiaries operate under their own brand names and have independent management structures while benefiting from the support of their parent companies.

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However, there are also potential disadvantages to creating a subsidiary. For example, governance challenges may arise due to the involvement of board of directors from the parent company. Additionally, there may be tax implications and additional costs associated with setting up and managing a subsidiary.

Wholly Owned Subsidiaries and Partially Controlled Subsidiaries

When a parent company owns 100% of the subsidiary, it is known as a wholly owned subsidiary. In this scenario, the subsidiary is completely controlled by the parent company and operates within its framework.

On the other hand, partially controlled subsidiaries are owned by a parent company and another company. These subsidiaries provide an opportunity for companies to enter new markets and expand their operations while sharing the risks and benefits with another business.

Advantages and Disadvantages of Subsidiary Companies (Pros and Cons)

Company subsidiaries offer a range of advantages and disadvantages for businesses. Understanding these pros and cons is essential for making informed decisions about whether to establish or operate through subsidiaries. Here, we delve into both the benefits and challenges associated with owning subsidiary companies:

Advantages of Company Subsidiaries

  1. Diversification of Revenue: Subsidiaries allow parent companies to diversify their revenue sources. By operating in different industries or markets, a parent company can reduce its dependence on a single line of business.
  2. Access to New Markets: Subsidiaries provide an avenue for expanding into new geographical regions or markets. They can help companies reach a broader customer base and tap into previously untapped opportunities.
  3. Risk Mitigation: In the case of partially controlled subsidiaries, the risks and benefits are shared with another company. This sharing of risk can help cushion the impact of adverse events on the parent company.
  4. Legal Protection: Subsidiary companies are separate legal entities, which means they can shield the parent company from certain liabilities. In case of financial difficulties or legal issues at the subsidiary level, the parent company’s assets may be protected.
  5. Tax Advantages: Subsidiaries can be established in jurisdictions with favorable tax rates or incentives. This can lead to reduced tax liabilities for the parent company and allow for efficient tax planning.
  6. Brand Independence: Subsidiaries can operate under their own brand names and have independent management structures. This allows them to maintain their unique identities while benefiting from the support of the parent company.

Disadvantages of Company Subsidiaries

  1. Governance Challenges: Parent companies may face governance challenges when overseeing subsidiary operations. Balancing the autonomy of subsidiaries with centralised decision-making can be complex.
  2. Board of Directors Involvement: The involvement of the parent company’s board of directors in subsidiary matters can lead to conflicts and slow decision-making processes.
  3. Costs: Establishing and managing subsidiaries can involve significant costs, including legal and administrative expenses. These costs can eat into the potential financial benefits.
  4. Complexity: Subsidiary structures can add complexity to a company’s organisational hierarchy. Managing multiple entities with their own operations and financial statements can be intricate.
  5. Regulatory Compliance: Subsidiaries operating in different jurisdictions may need to comply with varying regulatory requirements, adding to the compliance burden for the parent company.
  6. Cultural Differences: Subsidiaries in different regions may encounter cultural and operational differences that require careful management and adaptation.

Real-Life Examples

To illustrate the pros and cons of company subsidiaries, let’s consider two real-life examples:

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Example 1: The Walt Disney Company

Pros: The Walt Disney Company owns numerous subsidiaries, including Pixar, Marvel, and Lucasfilm. This diversification has allowed Disney to access different markets and revenue streams, ensuring its position as a global entertainment giant.

Cons: Managing diverse subsidiaries can be complex. Disney’s acquisition of 21st Century Fox, for instance, required extensive integration efforts, and governance challenges arose due to the sheer size and complexity of the merger.

Example 2: General Electric (GE)

Pros: General Electric operates multiple subsidiaries, each specialising in a different industry, such as aviation, healthcare, and energy. This diversification minimises the impact of economic fluctuations in any one sector.

Cons: In the past, GE faced governance and financial challenges due to its extensive subsidiary network. The parent company’s involvement in subsidiary operations led to complex decision-making processes.

Conclusion

In conclusion, company subsidiaries are a dynamic and integral part of the corporate landscape, offering both enticing opportunities and unique challenges. These entities, though legally distinct from their parent companies, contribute significantly to diversification, access to new markets, and even tax advantages.

However, the journey of establishing and managing subsidiaries is not without its complexities. Governance dilemmas, cost considerations, and the intricacies of regulatory compliance can test the mettle of even the most seasoned organisations.

As we’ve explored the intricacies of company subsidiaries, it becomes evident that they are a strategic choice, best undertaken with a clear understanding of the benefits and drawbacks they bring. Real-life examples, such as Disney’s expansive entertainment empire and General Electric’s diverse industrial portfolio, showcase the potential rewards of a well-managed subsidiary network.

In the ever-evolving landscape of business, the decision to embark on the path of company subsidiaries should be made judiciously, considering the specific goals and circumstances of the parent company. Ultimately, it’s the ability to balance the advantages and challenges that will determine the success of this corporate strategy.

FAQ

What are company subsidiaries?

Company subsidiaries are separate and distinct legal entities that are controlled by another company, known as the parent company or holding company. They operate as distinct businesses under the ownership and control of the parent company.

What is the relationship between parent and subsidiary companies?

Parent companies own and control subsidiary companies. The parent company holds a majority stake in the subsidiary’s shares and has the authority to make decisions regarding its operations and governance.

What are the advantages of having subsidiaries?

Subsidiaries offer several advantages, including the ability to diversify business operations, access new markets, and take advantage of tax benefits. They also provide a level of legal and financial protection for the parent company.

What are the disadvantages of creating subsidiaries?

Disadvantages of creating subsidiaries include the potential challenges in governance by the parent company and the involvement of the board of directors. There may also be additional costs associated with setting up and managing a subsidiary.

Are subsidiary companies separate legal entities?

Yes, subsidiary companies are separate and distinct legal entities from their parent companies. They have their own financial statements and legal obligations.

What is a wholly owned subsidiary?

A wholly owned subsidiary is a subsidiary company in which the parent company owns 100% of the subsidiary’s shares. It provides the parent company with complete control and authority over the subsidiary’s operations.

Can a subsidiary be partially controlled by another company?

Yes, a subsidiary can be partially controlled by another company. In such cases, the ownership of the subsidiary is shared between the parent company and the other company.

What are the tax advantages of owning subsidiaries?

Owning subsidiaries can offer tax advantages to the parent company, such as the ability to take advantage of tax incentives and deductions available in different jurisdictions where the subsidiaries operate.

How can subsidiaries contribute to the growth of a larger company?

Subsidiaries can contribute to the growth of a larger company by expanding its business operations into new markets, diversifying its product or service offerings, and generating additional revenue streams.

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Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.

Disclaimer: This document has been prepared for informational purposes only and should not be construed as legal or financial advice. You should always seek independent professional advice and not rely on the content of this document as every individual circumstance is unique. Additionally, this document is not intended to prejudge the legal, financial or tax position of any person.

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Get the specialist support you need

Whether you require specialised knowledge for your business or personal affairs, Gaffney Zoppi can support you.