The parent company can appoint the board of directors of the subsidiary and can make decisions about its business operations. The subsidiary must follow the directives of the parent company, but it also has some degree of autonomy. The parent company owns 100% of the subsidiary’s shares, so it has the final say on every decision, big or small. In a minority-owned subsidiary, the parent company is a significant investor but cannot make unilateral decisions. It may be able to elect some board members and influence some decisions, but it must work with other owners. This type of subsidiary can offer strategic benefits, like market entry or technology access, without the need for total control.

Then we’ll review why companies use this strategy and its role in mergers and acquisitions (M&A). While subsidiary company directors are allowed to manage the company as they see fit, the parent company can remove the directors in the event of unsatisfactory performance. Allowing directors to run the subsidiary company without constant oversight is generally a much better solution than the parent company dictating operations. Businesses often break themselves down into “divisions” to focus on certain product lines, geographic areas, or customer bases.

Types of Legal Entities for Subsidiaries

They are responsible for managing their own affairs and implementing the strategies set by the parent company. Although the parent company can usually control most of the shares of the subsidiaries, the former allows them to control and assume responsibility for all decisions related to the financial and operational system. In cases where a subsidiary is 100% owned by another firm, the subsidiary is referred to as a wholly-owned subsidiary. These become very important when discussing a  reverse triangle merger (a subsidiary created by an acquiring company, purchasing the former a target company, and being absorbed by the target company). Conversely, the parent may be larger than some or all of its subsidiaries (if it has more than one), as the relationship is defined by control of ownership shares, not the number of employees.

Understanding the Parent Subsidiary Relationship: Definition and Dynamics

But when a larger company acquires a smaller company—or at least a majority interest in it—the two companies typically retain their own financial statements. In such a structure, the acquiring company becomes the parent company and the acquired company becomes a subsidiary. Although the books are kept separately, the company typically also prepares (for presentation purposes) a set of consolidated financial statements—balance sheet, income statement, and statement of cash flows—that reflect combined performance. If the parent company doesn’t control more than half of the shares in the subsidiary, it is considered a minority-owned subsidiary. This setup allows the parent firm to step back and let the subsidiary run its day-to-day business.

What Is a Non-Disclosure Agreement and Why Is It Important in Business?

• Many of the tax reliefs and regulatory benefits require certain economic ownership conditions to be met i.e. the parent to own (directly or indirectly) a specified percentage of the ordinary share capital of the subsidiary.
• By having the votes of the minimum decision-making majority, or the votes to elect the board of directors.
• An acquisition may look promising on paper, but the real question is whether one plus one actually adds up to more than two.
• The subsidiary must follow the directives of the parent company, but it also has some degree of autonomy.
• If, for example, the business occupies a number of sites or properties, a group company can be formed to hold all the property assets (and to lease or licence the properties as required to the other relevant group members.

In this way, the parent business is able to exert complete authority over the subsidiary. From long-term planning to operational details, the parent has complete control. The board of directors of a parent and all subsidiaries together can be termed as parent company might greatly benefit from board management software.

Despite the name “parent company,” the relationship between a parent company and its subsidiaries is not the same as a parent and child relationship. While the parent company does hold influence over the subsidiary company, the subsidiary is a legally independent entity. A parent-subsidiary structure can streamline operations, expand market reach, and drive long-term growth—but only if the numbers (and the strategy) add up.

One of the biggest examples of a wholly-owned subsidiary is YouTube. It had great potential to transform online video content and digital media. By adding YouTube as a wholly-owned subsidiary, Alphabet gave the platform more freedom. It could innovate independently while still leveraging the parent company’s resources. If the parent company wants, it can appoint its own directors to the board of the subsidiary company. For example, this can make it difficult for the directors to make decisions, as they will be pulled between the interests of the parent company and those of the subsidiary.

Types of Subsidiaries

It’s a compelling structure that can confer numerous benefits but also poses unique challenges. A parent shall prepare consolidated financial statements using uniform accounting policies for similar transactions and other events in similar circumstances. The impact of holding assets outside the company/group also needs to be considered in the context of any future sale and the likely requirements of any potential buyer. Many of the tax reliefs and regulatory benefits require certain economic ownership conditions to be met i.e. the parent to own (directly or indirectly) a specified percentage of the ordinary share capital of the subsidiary. For example, lenders and suppliers may require the parent company to guarantee or underwrite the subsidiary’s liabilities.

A wholly owned subsidiary is a legal entity that is entirely owned by another entity, known as the parent company. This relationship between the entities is referred to as a parent-subsidiary relationship. The parent company holds all of the subsidiary’s outstanding shares and has complete control over its operations, management, and financial decisions.

This grants them significant control over the subsidiary’s decision-making, but allows for some level of independence. Majority-owned subsidiaries can operate with their own management and business strategies, while still adhering to the overall vision of the parent company. Like a devoted parent, a wholly owned subsidiary is completely owned and controlled by its parent company. The parent company has 100% of the voting shares, giving it absolute authority over the subsidiary’s decisions and operations. These subsidiaries often serve as extensions of the parent company, carrying out specific tasks or expanding its reach into new markets.

If the subsidiary faces financial challenges, the parent company is generally protected. This separation can be particularly advantageous in risky industries or new ventures. Parent companies are generally not liable for the debts and obligations of their subsidiaries. This is because subsidiaries are separate legal entities, and their liabilities are limited to their own assets. However, there are exceptions to this rule, such as when a parent company guarantees the debts of its subsidiary. Subsidiaries, on the other hand, are responsible for their own debts and obligations.

That is not to say that the use of a group structure can always ringfence all commercial risks and liabilities as, from a practical perspective, this may not be possible. A group structure can therefore also help to protect against reputational and commercial risk. Another alternative is to organise the business into divisions within a single company. Group structures can themselves take a variety of forms, from a horizontal structure, vertical structure to various forms of hybrid structures (examples of which are illustrated below).

This gives the parent company total control over the subsidiary’s operations. The parent can make all decisions, from strategic direction to day-to-day operations. When it comes to business, the terms “subsidiary” and “parent company” are often used interchangeably.

• Among these factors are the risk profile, the sector in which the company operates, and the unique financial and legal circumstances.
• There are a number of reasons why a group may be formed many of which are concerned with the management of risk.
• Mergers typically combine two businesses of similar strength, while an acquisition is the purchase of a smaller company by a bigger one.
• The establishment of a board of directors is a crucial step in establishing the organization’s leadership structure.

This gives the parent the necessary votes to elect their nominees as directors of the subsidiary, and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. There are, however, other ways that control can come about, and the exact rules both as to what control is needed, and how it is achieved, can be complex (see below).