What are the Attributes of a Subsidiary?
A subsidiary functions independently from its parent company. This is advantageous to the corporation in terms of taxation, regulation, and liability. Separate from its parent, the sub can sue and be sued. Its obligations are often its own and are not usually a parent business liability.
In this article, we will discuss What are the Attributes of a Subsidiary, Advantages of Subsidiary and more related subtopics.
The parent business will have the requisite votes to configure the subsidiary’s board of directors if it owns at least 51 percent of the subsidiary. This gives the parent complete influence over corporate decisions.
Parents and subsidiaries do not have to be in the same place or have the same business. Subsidiaries may have their own sub-companies, forming a business group with varied degrees of ownership.
Advantages
#1 Tax advantages
Deductions granted by the state can significantly lower a parent company’s tax liability. The income liability from profits earned by one subsidiary can often be mitigated by losses in another for parent firms with several subsidiaries.
#2 Risk mitigation
Because it creates a separation of legal entities, the parent-subsidiary arrangement reduces risk. A subsidiary’s losses are difficult to transmit to the parent. If the parent and subsidiary are legally or effectively one and the same, the subsidiary’s debts may be assigned to the parent in the event of bankruptcy.
#3 Efficiency gains and diversification
In some circumstances, dividing a huge firm into smaller, more manageable entities allows the parent company to achieve higher operational efficiency.
Disadvantages
#1 Limited authority
If a parent’s subsidiary is partly controlled by other entities, managerial control difficulties may arise. Because matters must be decided through the parent bureaucracy’s chain of command before action can be taken, decision-making can become cumbersome.
#2 Legal expenses
Both the formation of a subsidiary business and the filing of taxes result in lengthy and costly legal documentation burdens.
A Subsidiary Structure Example
Facebook is a well-known parent corporation in the internet economy. It has several investment portfolios in other firms in the social media industry and is the parent company of several software technology sub-companies, in addition to being publicly traded on the open market.
Sub-companies on Facebook include:
Instagram, LLC — a photo-sharing site acquired by Facebook for around $1 billion in cash and equity in April 2012. Instagram’s operational management remains distinct, with Kevin Systrom as CEO.
WhatsApp Inc. — In 2014, Facebook paid $19.3 billion for this popular messaging service.
Oculus VR, LLC — In March 2014, Facebook agreed to buy $2 billion worth of shares in Oculus, a virtual reality business.
Additional information
Thank you for taking the time to learn about sub-companies and the benefits and drawbacks of this type of business structure. CFI’s goal is to assist you in becoming the greatest financial analyst you can be. These extra CFI resources can assist you in achieving that goal:
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Registries of public companies
Tax-free zones
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