Subsidiary Company Definition and Examples

A subsidiary company is a corporation or limited liability company (LLC) under the ownership of a larger parent company or holding company. Parent companies typically own fifty percent or more of a subsidiary to have a controlling interest.

A parent company gains full control of a subsidiary when they own 100 percent of a company’s stock, making it a wholly owned subsidiary.

If a parent company owns less than fifty percent of another company, that company is usually known as an affiliate or associate company rather than a subsidiary. Subsidiary companies owned by the same parent company are called sister companies.

An independent company can become a subsidiary when a larger company takes over by buying enough of its stock (typically at least fifty percent) to obtain the majority of voting rights. Once in control, the parent company elects a board of directors to oversee the subsidiary business. A subsidiary’s board acts as the decision-making body for the business entity.

Subsidiary companies share their financial statements with their parent companies for oversight. A subsidiary company can form or acquire subsidiaries to create a subsidiary structure of first, second, and third-tier subsidiaries.

Consider some of the advantages of operating subsidiary companies.

1. 1. Diversification: Subsidiaries can expand a parent company’s influence, product lines, and assets. Whether acquiring an existing company or founding a new one, subsidiaries are a relatively low-risk way for companies to branch out.
2. 2. Expansion: Foreign subsidiaries allow companies to expand their operations to new markets. Different countries and states have their own laws; creating subsidiaries for other locations enables companies to comply with location-specific laws without applying those regulations to every location. For example, Starbucks has subsidiaries in Argentina, Canada, China, Thailand, and more.
3. 3. Legal protection: By operating as separate legal entities, parent companies and their other subsidiaries are typically protected against lawsuits and other legal disputes concerning one subsidiary, as long as that subsidiary is sufficiently independent.
4. 4. Tax advantages: If a parent company owns eighty percent or more of a subsidiary company, it must submit a consolidated tax return (CTR). A CTR allows the companies to combine financial records and receive possible tax benefits. For example, a parent company can include the losses of one subsidiary to offset the taxable profits of another subsidiary.

Consider some of the disadvantages of operating subsidiary companies.

1. 1. Management complexity: One of the disadvantages of subsidiaries is their complicated organizational structure. With a larger chain of command, subsidiary companies may suffer bureaucratic problems that slow business operations.
2. 2. Increased paperwork: A subsidiary structure requires considerable administrative work to manage legal and financial records. There is even more paperwork for parent companies that control multinational corporations as subsidiaries because each of those businesses has to conform to the laws in their respective countries.

To better understand subsidiary companies, familiarize yourself with the following examples.

1. 1. Condé Nast: Condé Nast, the media company that publishes Vogue and The New Yorker, is a wholly owned subsidiary of Advance Publications. Learn more about Condé Nast with global chief content officer and Vogue editor-in-chief Anna Wintour.
2. 2. Hulu: The streaming service Hulu is a subsidiary of the Walt Disney Company, which owns sixty-seven percent of the company; NBCUniversal is a silent partner with a minority interest.
3. 3. Marvel Entertainment: The comic book publisher and multimedia company Marvel Entertainment is a wholly owned subsidiary of The Walt Disney Company. Disney acquired Marvel in 2009 under CEO Bob Iger.

The difference between a parent company and a holding company is rooted in their interactions with their subsidiary businesses. Though these business entities are often considered interchangeable, parent companies are in charge of their business ventures and support their subsidiaries through their business activities.

Holding companies do not produce goods and generally have little interaction with their subsidiaries, save serving as a shell company—an inactive business operation—for assets and tax benefits and outstanding stock holdings.

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