Definition
A subsidiary company is a company that is completely or partly owned and controlled by another, known as the parent company. Ownership is typically gained through the acquisition of more than half of the subsidiary’s stock. The subsidiary operates as an independent legal entity, even though the parent company may make major decisions.
Key Takeaways
- A Subsidiary Company is a type of company that is completely or partly owned and wholly controlled by another company, termed as the parent company or holding company. They control the subsidiary by owning more than half of its stock shares.
- The financial, operational decisions, and management are under the hold and control of the parent company. They generally create subsidiaries to expand their operations into different sectors without bearing high risk.
- Despite being owned by another company, a subsidiary company is a separate legal entity from the parent company. This means they have their own assets, liabilities, and can sue or be sued independently from the parent company.
Importance
The term “Subsidiary Company” is significant in finance as it describes a company that is controlled by another, larger entity known as a parent company or a holding company.
This control usually takes the form of majority ownership of the subsidiary’s stock.
Subsidiaries can expand the parent company’s operations into different geographical areas or different sectors without disturbing the parent company’s structure.
Additionally, the losses or liabilities of a subsidiary do not transfer to the parent company, and they also provide tax benefits.
Therefore, subsidiaries play a major role in strategic planning and risk management for larger corporations, facilitating operational flexibility, financial management, and geographic or sector diversification.
Explanation
A subsidiary company essentially serves the purpose of expanding and diversifying the business operations and potential investments of a parent company. The parent company can control and manage the subsidiary’s operations, implement their business strategies and take advantage of the subsidiary’s strengths to drive overall growth. This allows the parent company to enter new markets, gain specialized business knowledge, or expand their product offerings by utilizing the expertise or resources of the subsidiary.
Consequently, a parent company can strengthen its competitive advantage in existing markets and explore opportunities in new ones. Moreover, a subsidiary company is an effective instrument for mitigating risk as it operates as a separate legal entity from the parent company. This means that the liabilities the subsidiary incurs do not directly affect the parent company.
For instance, if the subsidiary company goes bankrupt, its creditors cannot go after the parent company’s assets. The parent company also creates a subsidiary to protect its core business. If the parent company ventures into a high-risk business through the subsidiary and if the venture fails, only the subsidiary’s resources are at risk and not the parent company’s.
Hence, establishing subsidiaries offers parent companies a balanced blend of risk and reward.
Examples of Subsidiary Company
Alphabet Inc. and Google: Alphabet Inc. is a multinational conglomerate, created in 2015 as part of a corporate restructuring of Google. With this restructuring, Google became a subsidiary of Alphabet Inc. Under Alphabet Inc. there are various other subsidiaries including YouTube, Android, and Google Search.
Berkshire Hathaway and GEICO: Berkshire Hathaway, a multinational conglomerate holding company, owns a multitude of different companies. One of its well-known subsidiaries is GEICO, an auto insurance company. Berkshire Hathaway purchased GEICO in 1996 and since then, it has operated as a wholly owned subsidiary.
Disney and Pixar: In 2006, The Walt Disney Company purchased Pixar Animation Studios. Despite the acquisition, Pixar continues to operate independently under Disney’s ownership. This purchase made Pixar a subsidiary of Disney, which has allowed Pixar movies to utilize Disney’s widespread resources and distribution channels.
FAQs about Subsidiary Company
What is a Subsidiary Company?
A subsidiary company is a company that is completely or partially owned and wholly operated by another company, known as the parent company or the holding company. The parent company owns more than 50% of the subsidiary’s stock.
What are the benefits of having a Subsidiary Company?
Some benefits of having a subsidiary company include risk management, tax benefits, autonomy in operations, and diversified business operations. It allows the parent company to undertake new ventures which may have a different risk profile than its core operations.
How is a Subsidiary Company different from a Branch?
A subsidiary company has a separate legal entity from the parent company, whereas a branch does not. This implies the liabilities of a subsidiary are its own and they are not extended to the parent company, which is not the case with branches.
Can a Subsidiary Company become independent?
Yes, a subsidiary company can become independent if the parent company sells its controlling interest of stocks. However, the decision to let a subsidiary company go independent is usually up to the parent company.
Related Entrepreneurship Terms
- Parent Company
- Majority Shareholder
- Mergers and Acquisitions (M&A)
- Consolidated Financial Statement
- Minority Interest
Sources for More Information
- Investopedia – An extremely comprehensive source of financial information, including terminologies like ‘Subsidiary Company’.
- Business Dictionary – A dictionary specialized for business terms, providing simple and understandable descriptions.
- The New York Times (Business Section) – The business section often includes articles that discuss and explain various financial terms and concepts.
- Forbes – A well-known business and finance news site, offering articles, resources, and references about various financial terms and subjects.
