SUBSIDIARY

What is a Subsidiary?

A subsidiary (sub) is a business entity or corporationOtherArticles covering other finance topics ranging from Warren Buffett lớn hedge fund strategies. These other finance topics are an interesting read that is fully owned or partially controlled by another company, termed as the parent, or holding, company. Ownership is determined by the percentage of shares held by the parent company, & that ownership stake must be at least 51%.

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What are the Attributes of a Subsidiary?

A subsidiary operates as a separate & distinct corporationCorporationA corporation is a legal entity created by individuals, stockholders, or shareholders, with the purpose of operating for profit. Corporations are allowed khổng lồ enter inkhổng lồ contracts, sue and be sued, own assets, remit federal and state taxes, và borrow money from financial institutions. from its parent company. This benefits the company for the purposes of taxation, regulation, and liability. The sub can sue & be sued separately from its parent. Its obligations are also typically its own và are not usually a liability of the parent company.

The minimum màn chơi of ownership of 51% guarantees the parent company the necessary votes to lớn configure the subsidiary’s board. This allows the parent khổng lồ exercise control in company decision-making.

Parents and sub-companies need not operate in the same location, nor be in the same line of business. Subsidiaries may also have sầu their own sub-companies; the line of succession forms a corporate group with varying degrees of ownership.

Advantages

#1 Tax benefits

A parent company can substantially reduce tax liability through deductions allowed by the state. For parent companies with multiple subsidiaries, the income liability from gains made by one sub can often be offphối by losses in another.

#2 Risk reduction

The parent-subsidiary framework mitigates risk because it creates a separation of legal entities. Losses incurred by a subsidiary bởi not readily transfer to the parent. In case of bankruptcy, however, the subsidiary’s obligations may be assigned lớn the parent if it can be proven that the parent & subsidiary are legally or effectively one & the same.

#3 Increased efficiencies & diversification

In some cases, creating subsidiary silos enables the parent company to lớn achieve greater operational efficiency, by splitting a large company into lớn smaller, more easily manageable companies.

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Disadvantages

#1 Limited control

A parent may have management control issues with its subsidiary if the sub is partly owned by other entities. Decision-making may also become somewhat tedious since issues must be decided through the chain of comm& within the parent bureaucracy before action can be taken.

#2 Legal costs

Lengthy và costly legal paperwork burdens result, both from the formation of a subsidiary company & in filing taxes.

Example of a Subsidiary Structure

One popular parent company in the digital industry is Facebook. Aside from being publicly traded on the open market, it also has multiple investment portfolgame ios in other companies within the social truyền thông media industry and is the parent firm of several software giải pháp công nghệ sub-companies.

Examples of Facebook sub-companies are:

Instagram, LLC – a photo-sharing site acquired by Facebook in April 2012 for approximately US$1B in cash and stoông xã. Instagram remains separate in its operational management, being led by Kevin Systrom as CEO.WhatsApp Inc. – Facebook acquired this popular messaging application for roughly US$19.3B in 2014.Oculus VR, LLC – In March 2014, Facebook agreed to buy shares, worth $2B, of virtual reality company, Oculus.

Learn more about Facebook’s corporate structure ->https://investor.fb.com/

Additional resources

Thank you for reading this guide to lớn sub-companies and the various pros & cons of this type of corporate hierarchy. CFI’s mission is to lớn help you become the best financial analyst possible. With that goal in mind, these additional CFI resources can help you on your way: