Subsidiary

Reviewed by Bhavana | Updated on Aug 27, 2020

Meaning of a Subsidiary

A subsidiary in the business world is a corporation that belongs to another corporation and is generally referred to as the parent or holding company.

The parent has a controlling interest in the company, meaning it has more than half of its stock, or manages it. The subsidiary is referred to as a completely owned subsidiary in situations where a subsidiary is owned 100% by another company. When considering a reverse triangle mortgage, subsidiaries get very relevant.

How Does a Subsidiary Function?

A parent company buys or creates a subsidiary to provide particular synergies to the parent, such as enhanced tax advantages, diversified risk, or revenue, facilities, or property assets. Nonetheless, subsidiaries are independent and distinct legal entities from their parent corporations, representing their responsibilities, taxes, and governance independence. When a parent company owns a foreign land subsidiary, the subsidiary must comply with the laws of a country in which it is organised and operates.

Nevertheless, parent corporations also have significant leverage over their subsidiaries despite their controlling interest. They, along with other subsidiary shareholders (if any), – vote to elect the board of directors of a subsidiary corporation, and a board member may sometimes overlap between a subsidiary and its parent.

Pros and Cons of a Subsidiary

With respect to a parent organization, subsidiaries may contain and restrict problems. The use of the subsidiary as a kind of protection of liability against financial losses or litigation will restrict possible damages to the parent company. With this purpose, entertainment companies sometimes set individual films, or TV shows up as independent subsidiaries.

The subsidiary arrangement may also provide tax advantages: they can only be taxed in their nation or state, as opposed to having to pay for all the income of the parent.

Subsidiary companies can be the testing ground for different organizational systems, production methods, and product forms. Fashion-industry firms also have a range of brands or labels, each formed as a subsidiary.