What's a Holding Company Subsidiary

A subsidiary company is a company that’s owned and controlled by another (often larger) company. You may have heard of a subsidiary company referred to as a parent or holding company. The parent holding company that owns the subsidiary has control by owning at least 51% of the voting stock in that company.

There are a few ways to obtain this control, either by setting up the company and keeping majority shares or by purchasing these shares. When 100% is held by the parent company it is known as a “wholly-owned” subsidiary.

The Different Levels of a Subsidiary Company

Generally, there are three tiers of the parent-subsidiary structure. These are known as the first-tier subsidiary, second-tier subsidiary, and third-tier subsidiary, but can branch out as far as it wants.

The top of this pyramid is a company that is not owned by any other company. This is the parent company. Any subsidiary that is controlled by this company would be considered a first-tier subsidiary. When a first-tier subsidiary owns at least 51% of shares in another company, that would be referred to as a second-tier subsidiary. This can continue as long as the company chooses.

How Does a Subsidiary Company Work?

Subsidiaries are more common in some industries than others. For example, real estate companies often have subsidiaries. It begins with a company as a holding company that holds multiple properties. They may hold these properties and rent them out, and form a holding company by making each property its own LLC, as a subsidiary. This protects each home as a business and protects the parent holding company from the liabilities of each rental property.

Understanding the role of the subsidiary

As a rule, subsidiaries are viewed as a separate legal entity from their holding company. They hold their own tax liability, as well as governance, and even legal liabilities. Subsidiaries may sue other companies, but also be sued without any correlation with the parent company.

Despite this, because the holding company holds majority ownership, it will have a say in the day-to-day functions of the subsidiary. This includes the board of directors, as well as the potential to help with tax benefits, while still maintaining separate risk liability.

Is it Difficult to Start a Subsidiary Company?

Although it may sound simple, creating a subsidiary is not always an easy process. More often than not when one company works on its own, it is able to represent itself in all layers of business. When an organization owns another organization, the subsidiary loses control, and it gets a lot more to take on.

Not only are financial records held separately, but there may be transactions that occur that need to be monitored by the main company. Although the businesses operate independently, there are certain similarities that will be maintained between them. Finding the legal and managerial line can be difficult. Despite this, there are many benefits as well.

Benefits of a Subsidiary Company

There are several financial advantages of creating a subsidiary company. Here are a few of the most common benefits of subsidiary companies.

Tax Benefits

One reason why a holding company might purchase or obtain a subsidiary is due to taxes. Subsidiaries are only taxed on profits made in their state of formation. Rather than being taxed on all of the profits through the parent company.

This means that a huge corporation may take advantage of the lower or non-existent tax rates in one state, or country, but create or purchase a subsidiary in that country. The same can be said about nonprofit organizations. Subsidiaries often help non-profits remain tax-exempt.

Limited liability

One of the main reasons for creating a holding company subsidiary is the limited liability it affords. Legally there are lines that cannot be crossed to maintain this liability, but when it is maintained it gives a lot of protection to both entities. The holding company can use the subsidiary as a barrier against liability.

This is common in many different industries. This is why you may see a company as a subsidiary but with a slightly different variation at the end of the name. This is simply a way to separate the two entities legally in case a legal issue arises. This way the holding company will not be exposed to a lawsuit from that of the subsidiary, and they can protect their assets, while still using funding from the parent company.

More independence

In cases where a smaller company sells over 50% of its shares to a parent company, it does not mean that the subsidiary loses all of its control. Subsidiaries can be individually managed which allows the managerial structure to stay the same, while liabilities are continually protected.

Is a Subsidiary Right for You?

It is common for businesses to create or purchase subsidiary companies in order to grow. There are various benefits and allow faster expansion without the risk or liability that comes without a parent-subsidiary relationship.

If you are looking to maintain the liabilities and credit claims of the holding company structure while keeping the assets of your parent company safe, this might be an option for you. Including the tax benefits, and benefits to the subsidiary in terms of funding, creating a holding company provides valuable resources.

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