A subsidiary can be structured as one of several different types of corporate entity and is registered with the state where it resides as a subsidiary of the company that controls it.
What Is a Subsidiary?
A subsidiary company is a company that is completely or partially owned by another company, which may be a parent company that also has business operations or a holding company whose sole purpose is to own its subsidiaries. The holding or parent company must own more than 50% of the subsidiary company. If it owns 100%, the subsidiary company is called a “wholly owned subsidiary.”
How Does a Subsidiary Work?
Subsidiaries are common in some industries, particularly real estate. A company that owns real estate and has several properties with apartments for rent may form an overall holding company, with each property as a subsidiary. The rationale for doing this is to protect the assets of the various properties from each other’s liabilities. For example, if Company A owns Companies B, C, and D (each a property) and Company D is sued, the other companies can not be held liable for the actions of Company D. A subsidiary is formed by registering with the state in which the company operates. The ownership of the subsidiary and the type of corporate entity—such as a limited liability company (LLC)—are spelled out in the registration. Let’s say Company A wants to form a subsidiary to manage its properties. The subsidiary, Company B LLC, registers with the state and indicates that it is wholly owned by Company A.
How Are Subsidiaries Accounted For?
From an accounting standpoint, a subsidiary is a separate company, so it keeps its own financial records and bank accounts and track its assets and liabilities. Any transactions between the parent company and the subsidiary must be recorded. A subsidiary may also be its own separate entity for taxation purposes. Each subsidiary has its own employer identification number and may pay its own taxes, according to its business type. However, many public companies file consolidated financial statements, including the balance sheet and income statement, showing the parent and all subsidiaries combined. And if a parent company owns 80% or more of shares and voting rights for its subsidiaries, it can submit a consolidated income tax return that can take advantage of offsetting the profits of one subsidiary with losses from another. Each subsidiary must consent to being included in this consolidated tax return by filing IRS Form 1122.
Holding Company vs. Parent Company
Most holding companies’ sole purpose is to hold ownership of subsidiaries. If that’s the case, the company is referred to as a “pure” holding company. If it also conducts business operations of its own, it’s called a “mixed” holding company. One example of a pure holding company is publicly traded Alphabet Inc., whose purpose is to hold Google and other, lesser-known subsidiaries like Calico and Life Sciences. YouTube is, in turn, a subsidiary of Google. A parent company has its own business operations as well as subsidiaries that run their own operations. An example is Facebook Inc.: Instagram LLC, Oculus VR LLC, and WhatsApp Inc. all became subsidiaries of Facebook Inc. after Facebook acquired them.
Subsidiary vs. Affiliate or Associate
If a company owns 50% or less of another company—and thus does not control it—the partially owned company is called an “affiliate,” “affiliated company,” or “associate.”
Subsidiary vs. Branch or Division
You may have seen the terms “branch” or “division” used as synonyms for “subsidiary,” but they are not one and the same. A subsidiary is a separate legal entity, while a branch or division is a part of a company that is not considered to be a separate entity. A branch is usually defined as a separate location within the company, like the Pittsburgh branch of a company whose headquarters is in New York. A division is part of a company that performs a specific activity, such as the wealth management division of a larger financial services company.
