A subsidiary company is often set up by large companies when they want to outsource a certain part of their business or expand into new markets or abroad. Here we show you the relationship between subsidiary and parent company, and what the advantages and disadvantages of such a construct are.
Subsidiary company: Definition
A subsidiary company belongs to a holding company or parent company. The parent company holds at least 51% of the shares in the subsidiary company. By owning the majority of the shares, it controls the subsidiary company completely.
According to the law, holding company and subsidiary company are legally separate entities. This means that each company files its own tax return and is responsible for its debts. The liability between the two companies is therefore limited.
Subsidiary company and holding company operate independently
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.
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.
Purpose of a subsidiary company
A subsidiary company is often set up by large companies that want to outsource certain business areas or expand abroad. In this way, liability is shared between companies. If the parent company operates internationally and has subsidiaries in other countries, this can also result in tax advantages.
A subsidiary company that belongs to a large group can concentrate completely on its core business area. In this way, more productivity is achieved than if this particular area were incorporated in the parent company.
Holding and subsidiary company: Examples
There are many well-known examples of subsidiary companies. Often these are founded by very large corporations in order to further expand the recognition of a certain brand.
The Meta Group (formerly Facebook), for example, has the following subsidiaries: Instagram, WhatsApp and Oculus VR. The Walt Disney Group includes: Marvel, Lucas Films and Pixar. All are independent companies that focus on a specific core business.
Advantages and disadvantages of a subsidiary company
The big advantage of subsidiaries is that the parent company has tax advantages. By outsourcing certain business areas - and thus profits - it has to pay less tax. Especially if the subsidiary company is abroad, where taxation is more favourable, corporations can save money. More diversification and efficiency
By spinning off a particular division as a subsidiary company, the parent company can become more efficient in its own core business. The subsidiary company can then work independently on the further establishment of a brand or product line, whereby certain products achieve a higher level of awareness.
Less risk for parent company
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.
Less control for parent company
Since subsidiaries work independently, parent companies no longer have full control over the companies. Although they set the strategic goals, they are no longer involved in all corporate decisions - which can sometimes be a disadvantage.
More bureaucracy and higher costs
Setting up a subsidiary company involves a lot of bureaucracy. In addition, lawyers or other experts must be consulted to advise and draft contracts.
More risk for subsidiary company
The subsidiary company may be at higher risk, especially if it is created by spinning off a division from the parent company.
If, contrary to expectations, the business does not develop as desired and the subsidiary company has to file for insolvency, the parent company is only liable to a limited extent. Employees then do not always have the possibility of continued employment within the group.