In some cases, gains made via one subsidiary can be negated by losses from a parent and all subsidiaries together can be termed as second subsidiary, minimizing the amount of income that is taxed. A holding company is a type of corporation or entity that owns a significant portion of the shares or voting rights in other companies, known as subsidiaries. The primary purpose of a holding company is to hold and manage investments in other businesses rather than to engage in the day-to-day operations of those subsidiaries. When a parent company owns at least 80 percent of the shares of two or more subsidiaries, consolidated income tax returns allow the profits of one subsidiary to be offset by losses of another.

This corporate veil does not, however, shield the assets owned by the business from being levied to satisfy its creditors. For many business owners, this means that they still have a great deal of property, funds, and businesses equipment exposed. It should also be noted that owning a subsidiary means a significant increase in the parent company’s legal costs.

In the corporate world, a subsidiary is a company that belongs to another company, which is usually referred to as the parent company or holding company. The parent holds a controlling interest in the subsidiary company, meaning it owns or controls more than half of its stock. In cases where a subsidiary is 100% owned by another company, the subsidiary is referred to as a wholly owned subsidiary. The main problem with a partially owned subsidiary is that the parent company can’t always retain full control, even with a controlling interest. Partially owned subsidiaries may have control over funds, assets, and management without needing a green light from the parent company.

A subsidiary company is independent of the parent company when it comes to corporate decisions. Although it receives directional instructions to achieve the strategic goals of the group, it is largely free in its implementation and design. For example, in Atlanta both WNNX and later WWWQ are licensed to “WNNX LiCo, Inc.” (LiCo meaning “license company”), both owned by Susquehanna Radio (which was later sold to Cumulus Media). In determining caps to prevent excessive concentration of media ownership, all of these are attributed to the parent company, as are leased stations, as a matter of broadcast regulation. A parent company can structure the working relationship between itself and its subsidiary in a variety of different ways. Owning a subsidiary may also benefit a company when they want to maintain different types of company culture for their different ventures.

1. In many countries, parent and subsidiary companies can consolidate their financials, often leading to better tax rates for the parent company.
2. Subsidiaries may provide parent companies with a number of advantages, such as tax benefits, enhanced efficiency, greater diversification, and risk reduction as well as brand growth and recognition.
3. That said, the parent company, as a majority owner, can influence how its subsidiary is run and may be liable, for example, for the subsidiary’s negligence and debt.
4. A subsidiary company is often set up by large companies that want to outsource certain business areas or expand abroad.
5. The company originally incorporated under the name Google, but changed the name of the parent company to Alphabet in 2015.
6. When a parent company owns at least 80 percent of the shares of two or more subsidiaries, consolidated income tax returns allow the profits of one subsidiary to be offset by losses of another.

What Are Sister Companies?

1. Ownership of a subsidiary is usually achieved by owning a majority of its shares.
2. A subsidiary can be structured as a limited liability company (LLC), S-corporation, C-corporation, etc.
3. For example, the Kellogg company owns a controlling interest (51% or more) in the Eggo company.
4. Berkshire Hathaway’s acquisition of many diverse businesses follows Buffett’s oft-discussed strategy of buying undervalued assets and holding onto them.
5. The first and most obvious way is to acquire a controlling stake in an established company to sell its goods and services in the desired country.

In a merger, an acquiring company absorbs the assets of another company and the acquired company ceases to exist as a separate entity. A merger requires approval of the acquired company’s stakeholders; purchasing a controlling share of a company does not. A holding company is a company whose primary business is holding a controlling interest in the securities of other companies.1 A holding company usually does not produce goods or services itself. A holding company’s sole purpose is to unite and control a number of other companies or investment interests.

Tax benefits

In other cases, the products or services of a subsidiary may be closely related to its parent company. Google and YouTube, both wholly owned subsidiaries of Alphabet, are internet platforms that derive the majority of their revenues from advertising. The fact that the subsidiary company is legally separate from the parent company reduces the risk for the parent company. If business in the subsidiary declines, the parent company is not affected in the event of insolvency and is only liable for the shares it holds in the subsidiary.

Who does the accounting for a partially owned subsidiary?

Many companies establish subsidiaries in other countries, sometimes because the country where a subsidiary is being established requires this. It is also common for large U.S. companies to establish subsidiaries overseas to take advantage of a country’s lower tax rate. Soon after being elected, President Joe Biden announced desire to implement an offshore tax penalty for companies that produce goods and services offshore but sell them in the U.S. Corporations can file consolidated federal tax returns for multiple affiliated companies that consist of a parent and subsidiaries that are directly or indirectly owned at at least the 80% level.

Other shareholders still retain some input in the business’s operations, but the controlling company ultimately has the final say. From an accounting perspective, a subsidiary is an independent entity and, therefore, has its own assets, liabilities, bank accounts and maintains its own financial records. Equity can be defined as stock or any other security representing an ownership interest in a company.

One reason this may be done is to offset the net loss of one company against the net profit of another company in the group. A company can also acquire a controlling share of another company and make it a subsidiary with less capital than it may take to merge with another company. Or it can undertake a “short-form merger” with a subsidiary in which it has at least 90% ownership and take the unit over completely, often without the need for shareholder approval. A subsidiary can be created when a company purchases another company—or at least becomes the majority shareholder. In this way, the subsidiary company’s managing directors can determine for themselves how to orientate their operational business and make decisions regarding priorities, hire employees, set up new divisions or close less lucrative divisions. In some states, a business owner can set up a corporation or LLC with a nominee manager, allowing the true ownership of the company to go undisclosed.

Holding company

That means that all the subsidiary’s accounting, from payroll to revenue reports, can be done by the subsidiary itself. A joint venture subsidiary is one of various strategic options available for businesses seeking to enter new markets or expand their operations. Joint ventures and subsidiaries are separate concepts, but they may be combined to offer a unique set of advantages. Learning the difference between a subsidiary and a joint venture can ensure a better understanding of business operations. A parent company can set up a wholly-owned subsidiary in a foreign market in a couple of different ways.

Acquisitions may be costly to execute and there may be inherent risks (geopolitical, currency, trade) that come with doing business in another country. As a subsidiary functions as a separate entity, it usually has its own management team and CEO. However, the parent company will get a significant say in who runs the company and who sits on its board of directors. Berkshire Hathaway’s acquisition of many diverse businesses follows Buffett’s oft-discussed strategy of buying undervalued assets and holding onto them.