Subsidiary Definition

A subsidiary is a separate company that is controlled and owned, either partially or wholly, by another larger company, known as the parent company, which holds the majority of its shares and makes strategic decisions.

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What is a subsidiary?

A subsidiary is a company owned by another company, called a “parent company” or “holding company.” The holding company controls the subsidiary by appointing its choice of directors and managers. To be a holding company, it must own a “controlling interest” in the subsidiary, meaning at least 51% of that company’s shares. If the parent owns 100% of the subsidiary, it’s called a “wholly owned” subsidiary. 

Subsidiary Benefits

After learning the definition of a subsidiary, you may wonder why a business might need one or more of them. The benefits include:

  • Tax benefits — The parent company can save on taxes by accounting for the subsidiary’s profits and losses on a consolidated return.
  • Brand differentiation — Companies can use subsidiaries to separate brand identities or operate in different industries.
  • Operational continuity — When purchasing an existing company, acquiring it as a subsidiary allows it to continue operating without much change.
  • Risk management — Business owners can choose to keep a subsidiary private even if the parent is a public company.
  • Liability protection — Creditors of the subsidiary usually cannot reach the assets of the parent company to pay for the subsidiary’s liabilities.

Whether your business purchases an existing company’s shares or forms a new company, the subsidiary is a common corporate strategy.

Subsidiary Disadvantages

The subsidiary exists as a separate legal entity within the conglomerate. Therefore, a subsidiary can require more paperwork and taxation and potentially faces more red tape than a single business. Operating a subsidiary can also leave the business owner with a decreased focus on the original business. Finally, if the two companies have a conflict of interest, such as a duplicative product or market, it can cause management clashes. 

Other Names for a Subsidiary

Just as the holding company is sometimes called the “parent,” the subsidiary company is sometimes called the “daughter company.” While there can be some variations in terminology, these names typically refer to the same entities.

Subsidiary Examples

A subsidiary and its parent can be corporations or limited liability companies (LLCs). Here are some famous examples of subsidiary companies and their parents:

  • Frito-Lay and PepsiCo
  • ABC Television Group and The Walt Disney Company
  • Dairy Queen and Berkshire Hathaway
  • Oscar Mayer and Kraft-Heinz
  • Ben & Jerry’s and Unilever

As you can see, companies around the world use subsidiaries to control and manage large, diversified businesses.

We can help

If you’re thinking about expanding your company and opening a subsidiary, we can help. Our business formation experts are here to provide compliance assistance and more as your business grows. Our products and services will help you prepare for the next stage of business ownership.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Written by Team ZenBusiness

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