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Summary: It’s very common for large multinational corporations to own subsidiaries in each country they do business in.
Subsidiary
A subsidiary is a company that is owned and operated by a holding company. Holding companies are also called parent companies, and subsidiaries can be called daughter companies. These companies, though separate legal entities, are related through this family-like structure of ownership.
How does a subsidiary operate within a larger corporate structure?
It’s very common for large multinational corporations to own subsidiaries in each country they do business in. Since these subsidiaries are owned by the parent company, they can represent the corporation’s brand while complying with different local laws and statutes.
Another common way that a subsidiary operates within the framework of a larger corporation is as a functional unit. Rather than keeping all parts of a business under the same roof, subsidiaries can be created that perform highly different and separate functions. These functional subsidiaries may or may not be located in the same country as the parent company.
What are the benefits of establishing a subsidiary for a parent company?
Since it’s standard for international corporations to set up subsidiaries, there must be benefits to doing so. These are some of the main benefits for parent companies:
- Taking advantage of existing infrastructure: Parent companies can buy existing companies and turn them into subsidiaries. This can allow them to quickly gain access to specialized teams, equipment, or processes that they’d otherwise take much longer to develop on their own.
- Gaining benefits from different zoning and tax laws: Parent companies must abide by the laws that apply where they’re headquartered. However, by setting up subsidiaries in other states or countries, they can decrease operational costs and possibly pay less in corporate taxes, thus increasing overall profitability.
- Maintaining privacy: Large corporations may be publicly owned by shareholders. However, a subsidiary can be owned privately and, therefore, may be used to protect trade secrets or strategically disclose new research and product developments.
- Keeping brands separate: Companies that own many brands may assign them to subsidiaries to help them maintain their independence and individual identities.
How is a subsidiary formed?
A subsidiary can be formed by simply registering a new business entity. However, a subsidiary is either fully or partially owned by a parent company, which means that on its incorporation, the parent company must own over 50% of its shares. It’s also common for a parent company to buy an existing company and re-incorporate it as a subsidiary. This allows a corporation to perform new functions or access specialized skills.
What are the key legal considerations of forming a subsidiary?
It’s important to reiterate that although the parent company owns its subsidiary fully or by majority, the companies are independent legal entities. This means that while the parent owns the daughter company, it’s not liable for it. The subsidiary owns its own assets, makes its own deals, and assumes its own debts.
If there are any legal disputes aimed at a subsidiary, the parent company is not responsible for them. The subsidiary is also not responsible for the actions of the parent company. Subsidiaries are typically set up in jurisdictions other than the parent company, such as other states and countries. The subsidiary has to abide by the laws in the jurisdiction where it is incorporated, not the laws governing the parent company.
What are the management and operational differences between a subsidiary and its parent company?
As separate organizations and legal entities, the parent and daughter companies may be managed in similar or completely different ways. The parent company may closely control the management of the subsidiary or leave it to operate on its own with simple oversight.
The subsidiary will have its own CEO. However, the subsidiary is answerable to its shareholders, and the main or only one is the parent company. This makes the subsidiary answerable to the parent company’s board of directors. The parent may also dictate certain activities to help maintain the overall corporate brand.
How do financial transactions between a parent company and its subsidiary work?
In essence, a subsidiary’s finances are independent of the parent company. It manages its own spending, owns its own assets, and has its own accounts. At the same time, it makes a profit and has to pay these on to its parent company. These payments can take the form of dividends, interest payments on capital loans, rent, and distributions. The parent company may also provide management services to its daughter companies for which it can be compensated.
Andrew (Drew) joined the Remote People team in 2020 and is currently Director, Regulatory Affairs. For the past 13 years, he has been a trusted advisor to C-Suite executives and government ministers on international compliance and regulatory issues. Drew holds a law degree from the University of Otago, a PhD from the University of Sydney, and is an enrolled Barrister and Solicitor of the High Court of New Zealand.
