What is a Subsidiary Company?

A subsidiary company is a business entity that is controlled by another organization through ownership of a majority of its common stock. If the owning entity has acquired 100% of the shares of a subsidiary, the subsidiary is referred to as a wholly-owned subsidiary. The owner of a subsidiary company is referred to as the parent company or a holding company. A parent company may own dozens or even hundreds of subsidiary companies.

When to Use a Subsidiary Company

There are several circumstances under which it can make sense to set up a subsidiary company. Some of these scenarios are as follows:

To limit legal and financial liability. Establishing a subsidiary can protect the parent company from legal and financial risks tied to a specific line of business. If the subsidiary incurs debts or faces lawsuits, the parent’s assets are generally shielded. This separation creates a safer structure for higher-risk ventures.
To enter foreign markets. When expanding internationally, setting up a local subsidiary helps the company comply with local laws, regulations, and business practices. It also builds trust with local customers and partners by presenting a localized presence. Additionally, it may offer tax or operational advantages specific to that region.
To separate different lines of business. Companies with diverse operations (e.g., manufacturing and real estate) may establish subsidiaries to manage each segment independently. This allows for clearer financial reporting, specialized management teams, and focused strategic planning. It also simplifies performance evaluation and potential future divestitures.
For tax optimization. A subsidiary may be formed in a jurisdiction with favorable tax laws to reduce the overall tax burden. This can involve transferring certain assets or functions to the subsidiary to take advantage of lower rates or incentives. However, this must be done carefully to comply with international tax regulations.
To facilitate joint ventures or partnerships. When collaborating with another company, creating a subsidiary can provide a neutral structure for the partnership. Both parties can contribute capital and share control, while isolating the venture from their main businesses. This setup helps manage risk and define ownership clearly.

Subsidiary Company Advantages

There are several advantages to using the subsidiary company structure, which are as follows:

Different operational structure. The parent company can install an operational structure in a subsidiary that differs from what it is using at the parent level. This can be useful for tailoring operations to the market served by the subsidiary.
Reduced risk. The corporate structure of a subsidiary can be used to contain risk within that entity. Under this structure, the risks of the subsidiary do not spill over into the rest of the corporate structure.
Preparation for sale. The parent company can collect certain assets into a subsidiary in order to present them for sale to outside parties. This allows the parent to sell the entire subsidiary entity.