Subsidiary Definition, How It Works, and Examples

Subsidiaries are an important part of the legal structure of nearly every large company. While they are established through acquisitions or spin-offs, they differ from divisions or branches. Facebook’s acquisition of Instagram in 2012 transformed Instagram into a subsidiary, maintaining its unique identity while enjoying the resources of a larger entity. Affiliate and subsidiary banks are the most popular arrangements for foreign market entry in the banking industry. These banks must follow the host country’s banking regulations but this type of corporate structure allows these banking offices to underwrite securities. Finance Strategists has an advertising relationship with some of the companies included on this website.

The owning company, called a parent, can be a functional business selling its own products and services. It could also be a holding company whose primary purpose is owning other businesses. A “subsidiary company” refers to a business that is wholly or majority owned by another company. The company that owns a subsidiary is often called a “parent” or “holding” company. A parent company can substantially reduce tax liability through deductions allowed by the state.

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This means the business assets of each protected series are off limits to creditors of any other protected series or the parent LLC. Forming an LLC often requires paying an annual fee to keep the company in good standing, in addition to the one time filing fees. For example, Delaware requires all LLCs in the state to pay a $300 Annual Franchise Tax each year. In this article, we discuss what subsidiary companies are, how they are used, and the best way to structure them. The term “subsidiary” is used often in business, however, you might not know exactly what it means.

Subsidiaries can also help the parent company to reach global markets with ease and adapt quickly to changes in the market. Subsidiary Companies offer existing businesses a chance to enter new markets or product lines without having to create a completely new business structure from scratch. Subsidiary stock dividends and capital gains also get taxed at separate rates than parent company stock.

Operational Flexibility

Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications. Our work has been directly cited by organizations including MarketWatch, Bloomberg, Axios, TechCrunch, Forbes, NerdWallet, GreenBiz, Reuters, and many others. If a parent owns a subsidiary in a foreign land the subsidiary must follow the laws of what is a subsidary the country where it is incorporated and operates. A branch is usually defined as a separate location within the company, like the Pittsburgh branch of a company whose headquarters is in New York. A division is part of a company that performs a specific activity, such as the wealth management division of a larger financial services company. In affiliate marketing, one company is paid when it drives traffic to another company’s website and a customer buys a product.

Subsidiary vs. Affiliate or Associate

After the parent company purchased the subsidiary the parent will receive synergies such as increased tax benefits, diversified risk or assets in the form of earnings, equipment or property. When a subsidiary is 100% owned by a parent company, it’s called a wholly owned subsidiary. The parent company holds all common stock in the subsidiary, achieved by either forming the subsidiary or acquiring full control of the company. In a wholly owned subsidiary, the parent company has direct control over appointing the subsidiary’s board of directors, thus giving it a high degree of influence over the subsidiary company. Parent companies benefit from the financial performance of their subsidiaries in several ways.

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• This relationship allows the parent company to control the subsidiary’s operations, management, and policies while maintaining its status as a separate legal entity.
• Merrill Lynch International serves customers worldwide and offers wealth management, research, analysis, fixed income, investment strategies, financial planning, and advisory services.
• Subsidiaries can be used to enter new markets, product lines, and countries without having to create a whole new business structure.
• This benefits the company for the purposes of taxation, regulation, and liability.
• Historically, they emerged as entities formed for specific purposes, either by acquiring a majority stake in another company or spinning off a division of the parent firm.
• Delaware requires Series LLCs to pay only one filing fee and one annual franchise tax no matter how many protected series they form.

What are Subsidiary Companies best for?

Also, subsidiaries often operate as distinct legal entities from the parent company. For example, Dairy Queen and GEICO, two wholly owned subsidiaries of Berkshire Hathaway, serve completely different consumer needs. An unconsolidated subsidiary is a subsidiary with financials that are not included in its parent company’s statements. Ownership of unconsolidated subsidiaries is typically treated as an equity investment and denoted as an asset on the parent company’s balance sheet. For regulatory reasons, unconsolidated subsidiaries are generally those in which a parent company does not have a significant stake.

Many times, however, a parent company creates subsidiaries and keeps them separate entities for the purpose of limiting the liability of the parent company. Parent companies have been sued by creditors of a subsidiary company, but courts have not always held the parent company liable for the financial responsibilities of a subsidiary. In other cases, the products or services of a subsidiary may be closely related to its parent company. Google and YouTube, both wholly owned subsidiaries of Alphabet, are internet platforms that derive the majority of their revenues from advertising.

• Subsidiaries are separate legal entities from their parents, so Subsidiaries pay taxes on all of their income.
• Meanwhile, the parent company maintains ownership of these businesses under one entity while overseeing how they are being run.
• By doing so, the parent company leverages its expertise while tapping into a new revenue stream, reducing its exposure to fluctuations in the technology sector.
• A business entity can create a subsidiary company or become the parent company of an existing business by buying majority shares.
• Many times, however, a parent company creates subsidiaries and keeps them separate entities for the purpose of limiting the liability of the parent company.
• An example of a subsidiary company is the relationship between The Walt Disney Company and its subsidiaries like Marvel Studios and Pixar Animation Studios.

A subsidiary can be structured as one of several different types of corporate entity and is registered with the state where it resides as a subsidiary of the company that controls it. When it comes to the legal, financial, and tax implications, there are no such things as being too informed or prepared. In addition, some states may require LLCs to have separate filings between parent and subsidiaries for Franchise Tax or other state income tax based on gross sales or net income for doing business in said state. An S Corporation cannot be owned by a C Corporation, LLC, Partnership, or another S Corp (with a few exceptions).