Subsidiary Definition

Learn more about what a subsidiary is in business.

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Entrepreneurs that dream big are our expertise. While some corporations start small, forming a subsidiary is one way to grow and expand your business. What does it mean to do business as a subsidiary, and what are the advantages and disadvantages? Many well-known corporations operate subsidiary companies for tax benefits, brand recognition, and risk management.

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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 parent company controls the subsidiary by appointing its choice of directors and managers. To be a parent 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 is called a “wholly-owned” subsidiary.

Subsidiary Benefits

After learning the definition of a subsidiary, you may wonder why a small business might need a subsidiary. 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 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

Under the subsidiary business definition, the subsidiary exists as a separate legal entity within the conglomerate. Therefore, a subsidiary requires more paperwork and taxation and faces more bureaucracy than a single business. Operating a subsidiary can leave the business owner with decreased focus on the original business. Finally, it’s common for the two companies to have a conflict of interest, such as a duplicative product or market.

Other Names for the Subsidiary

Just as the controlling company is called the “parent,” the subsidiary company is sometimes called the “daughter company.” Also, some business circles refer to the subsidiary as a “sub.”

Subsidiary Examples

A subsidiary and its parent can be a corporation or a limited liability company. 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 a large, diversified business.

Summary

A subsidiary is a company owned and controlled by a parent company, which possesses a controlling interest in the subsidiary. The subsidiary company can provide tax benefits, brand identification, and additional liability and financial protections to its parent company.

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If you’re thinking about expanding your company and opening a subsidiary, we can help. Our business formation experts are here to provide guidance and direction 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 informational 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.