Subsidiary - What is a Subsidiary Company and How Does it Work
Table of Content The managers in a subsidiary do not work for the parent company. Combining them to create a subsidiary relationship is actually a pretty. On a “corporate organization” chart, a subsidiary the Bank Holding Company Act defines a parent-subsidiary relationship as the ownership by the parent. This is a template of holding company structure. Holding company structure diagrams are another variety of organizational structure diagrams. You can use this.
Infographic: These 14 Companies Control the Entire Auto Industry
That means that they can be different legal structures, such as a corporation and an LLC. You must also take steps to ensure that you are complying with state law to maintain these structures. That includes having separate: The managers in a subsidiary do not work for the parent company.
Instead, they report to the parent company just as they would a majority shareholder or member. The parent company maintains control by drafting the corporate bylawsLLC membership admission agreementor other formation documents in a certain way.
What is a Wholly-Owned Subsidiary, Partly-Owned Subsidiary or an Equity Investment?
Benefits of a Subsidiary Structure There are all kinds of reasons to have a subsidiary structure. Many of these reasons deal with mitigating or addressing risk.
For example, imagine you own a business that makes natural soaps. Your business is doing well, so you consider adding an additional venture that produces natural toothpaste. While the two products are similar, they are different enough that you have some concerns about risk. One of the ways that you can deal with that is to create a separate company that only produces your new toothpaste. That way, if your venture falls through, the assets in your soap business will be protected.
In other situations, you may have a buyer that only wants to purchase a portion of your company. You can use subsidiaries to facilitate a sale of just part of your larger business as well. Other benefits of a subsidiary structure may include the following: Sharing resources — Using a subsidiary instead of two separate businesses allows you to keep using a lot of the resources of the larger company, including your marketing efforts and goodwill.
Tax benefits — In some situations, you may be able to offset losses in one part of your business with revenues in another part of the company.
Structuring that addresses employment laws — Sometimes smaller businesses can avoid some of the more in-depth requirements for necessary employee benefits such as retirement plans, health care, and wage laws. Developing a subsidiary can help you save money on these various expenses as well.
Ease of setup — Creating several connected businesses is relatively easy to do, especially compared to the benefits available in the long run.
LLCs are a great business structure to use in subsidiary arrangements because they offer asset protection without all of the paperwork or other requirements that many state laws require of corporations. Creating an LLC operating agreement and you may need several of them is relatively straightforward.
Every business is different, and the benefits that matter the most for your structure may not be the same as the next business owner.
Nonetheless, LLCs are often one of the best options for a subsidiary structure. What Is an LLC? A limited liability company, or LLC, is one of the least complicated and most advantageous business structures available today.
How to Best Use LLCs in a Subsidiary Structure | LegalNature Support
It offers the benefits of pass-through taxation without all of the filing requirements of a corporation. That means that taxes are often lower, with far less hassle and paperwork. It also offers great asset protection between your personal assets and your business assets, or, in the case of subsidiary structures, among business entities.
LLCs and Asset Protection One of the most valuable aspects of creating an LLC is that it offers business owners a way to protect their personal assets if the business is sued or has a significant outstanding debt to a creditor. Sole proprietorships and partnerships leave personal assets open to this type of risk, but an LLC keeps everything separate.
LLCs also keep business assets separate among several businesses as well. Holding several partnerships, for example, would leave each partnership vulnerable to the obligations of each other.
In that type of situation, you might as well have everything in one large company because that is what is being done from an asset protection standpoint anyway. Instead, creating several LLCs connected by one large LLC or corporation would keep the business liabilities from overlapping.
- 14 Companies Control the Entire Auto Industry
- The Relationship Between a Company & Its Subsidiary
- How to Best Use LLCs in a Subsidiary Structure
As they expand, they may want to include additional brands or categories of products. That means that you may start out with one or two companies already. Combining them to create a subsidiary relationship is actually a pretty straightforward process.
Some businesses choose to use their oldest and most well-known company as the parent. That way, many people associate their good name with each subsidiary. However, creditors of an insolvent subsidiary may be able to obtain a judgment against the parent if they can pierce the corporate veil and prove that the parent and subsidiary are mere alter egos of one another, therefore any copyrights, trademarks, and patents remain with the subsidiary until the parent shuts down the subsidiary.
One of the ways of controlling a subsidiary is achieved is through the ownership of shares in the subsidiary by the parent.Meaning of Parent, Subsidiaries, Group and Consolidated Financial Statements
These shares give the parent the necessary votes to determine the composition of the board of the subsidiary, and so exercise control.
There are, however, other ways that control can come about, and the exact rules both as to what control is needed, and how it is achieved, can be complex see below. A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own.
A parent and all its subsidiaries together are called a corporate groupalthough this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership. A parent company does not have to be the larger or "more powerful" entity; it is possible for the parent company to be smaller than a subsidiary, such as DanJaqa closely held family company, which controls Eon Productionsthe large corporation which manages the James Bond franchise.
Conversely, the parent may be larger than some or all of its subsidiaries if it has more than oneas the relationship is defined by control of ownership shares, not the number of employees. The parent and the subsidiary do not necessarily have to operate in the same locations or operate the same businesses.
Not only is it possible that they could conceivably be competitors in the marketplace, but such arrangements happen frequently at the end of a hostile takeover or voluntary merger. Also, because a parent company and a subsidiary are separate entities, it is entirely possible for one of them to be involved in legal proceedings, bankruptcy, tax delinquency, indictment or under investigation while the other is not. Tiered subsidiaries[ edit ] In descriptions of larger corporate structures, the terms "first-tier subsidiary", "second-tier subsidiary", "third-tier subsidiary" etc.
The ownership structure of the small British specialist company Ford Component Sales, which sells Ford components to specialist car manufacturers and OEM manufacturers, such as Morgan Motor Company and Caterham Cars illustrates how multiple levels of subsidiaries are used in large corporations: Ford Motor Company — U. These concepts may have different meanings in various areas of law e.