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(Redirected from Subsidiary company)
A 'subsidiary', in business, is an entity that is controlled by another entity. The controlled entity is called a company, corporation, or limited liability company, and the controlling entity is called its parent (or the parent company). The reason for this distinction is that an individual cannot be a subsidiary of any organization; only an entity representing a legal fiction as a separate entity can be a subsidiary. While individuals have the capacity to act on their own initiative, a business entity can only act through its directors, officers and employees.
The most common way that control of a subsidiary is achieved is through the ownership of shares in the subsidiary by the parent. These shares give the parent the necessary votes to determine the composition of the board 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). A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own. A parent and all its subsidiaries together are called a group, although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership. When ownership is not shared, so that a subsidiary is owned, it is called a branch. A subsidiary is different from a branch in that the former is jointly owned by the parent company and others while the latter is completely owned by the parent company.
Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For this reason, they differ from divisions, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it.
Subsidiaries are a common feature of business life and few if any major businesses do not organise their operations in this way. Examples include holding companies such as Berkshire Hathaway[1], Time Warner, or Citigroup as well as more focused companies such as IBM, or Xerox Corporation. These, and others, organize their businesses into national or functional subsidiaries, sometimes with multiple levels of subsidiaries.
An 'operating subsidiary' is a business term frequently used within the United States railroad industry. In the case of a railroad, it refers to a company that is a subsidiary but operates with its own identity, locomotives and rolling stock.
In contrast, a 'non-operating subsidiary' would exist on paper only (i.e. stocks, bonds, articles of incorporation) and would use the identity and rolling stock of the parent company.
__NOTOC__
The following are common reasons why companies have subsidiaries, but no list can ever be exhaustive.
★ Risk: Many businesses use subsidiaries to manage risk. This is achieved usually by setting up a subsidiary corporation to undertake the higher risk venture. If that venture subsequently become subject to litigation or liability, legally the subsidiary corporation would be liable and not the parent (unless the parent made guarantees, in which case the parent is liable for the guarantees it made).
★ Acquisition: When one company acquires another, the one acquired becomes a subsidiary of the acquiring company.
★ Regulation: Law may require a company to conduct certain activities through a distinct entity. Examples include banking or the operation of utilities such as electricity or telecommunications. As subsidiaries are distinct legal entities, this ensures full disclosure of the financial results of these businesses and insulates them from the other activities of their group.
★ Territoriality: A group, particularly a multinational one, may create subsidiaries in many jurisdictions simply to prevent someone else doing so to the confusion of their customers.
★ Taxation: Taxation is still largely conducted on national lines. Multinational businesses may therefore establish subsidiaries in each jurisdiction to bring together all their activities in that jurisdiction.
The word "control" used in the definition of "subsidiary" is generally taken to include both practical and theoretical control. Thus, reference to a body which "controls the composition" of another body's board is a reference to control in principle, while reference to being are able to cast more than half of the votes at a general meeting, whether legally enforceable or not, refers to theoretical power. The fact that a company has a holding of less than 51% which, because the holdings of others are widely dispersed, gives effective control is not enough to give that company 'control' for the purpose of determining whether it is a subsidiary.
In Australia, for instance, the accounting standards defined the circumstances in which one entity controls another. In doing so, they largely abandoned the legal control concepts in favour of a definition that provides that 'control' is "the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity." This definition was adapted in the Australian Corporations Act 2001: s 50AA.[1]
The subsidiary can also be made with the intent to defraud the investor, and therefore a court should keep in mind as to for what reasons the subsidary has been made.
★ Mergers and acquisitions
★ Conglomerate (company)
★ Zaibatsu
★ Keiretsu
★ Chaebol
{{FootnotesSmall|resize=
A 'subsidiary', in business, is an entity that is controlled by another entity. The controlled entity is called a company, corporation, or limited liability company, and the controlling entity is called its parent (or the parent company). The reason for this distinction is that an individual cannot be a subsidiary of any organization; only an entity representing a legal fiction as a separate entity can be a subsidiary. While individuals have the capacity to act on their own initiative, a business entity can only act through its directors, officers and employees.
The most common way that control of a subsidiary is achieved is through the ownership of shares in the subsidiary by the parent. These shares give the parent the necessary votes to determine the composition of the board 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). A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own. A parent and all its subsidiaries together are called a group, although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership. When ownership is not shared, so that a subsidiary is owned, it is called a branch. A subsidiary is different from a branch in that the former is jointly owned by the parent company and others while the latter is completely owned by the parent company.
Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For this reason, they differ from divisions, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it.
Subsidiaries are a common feature of business life and few if any major businesses do not organise their operations in this way. Examples include holding companies such as Berkshire Hathaway[1], Time Warner, or Citigroup as well as more focused companies such as IBM, or Xerox Corporation. These, and others, organize their businesses into national or functional subsidiaries, sometimes with multiple levels of subsidiaries.
An 'operating subsidiary' is a business term frequently used within the United States railroad industry. In the case of a railroad, it refers to a company that is a subsidiary but operates with its own identity, locomotives and rolling stock.
In contrast, a 'non-operating subsidiary' would exist on paper only (i.e. stocks, bonds, articles of incorporation) and would use the identity and rolling stock of the parent company.
__NOTOC__
| Contents |
| Reasons why a company may have subsidiaries |
| Control |
| See also |
| Business models which feature elements similar to subsidiaries |
| Footnotes |
Reasons why a company may have subsidiaries
The following are common reasons why companies have subsidiaries, but no list can ever be exhaustive.
★ Risk: Many businesses use subsidiaries to manage risk. This is achieved usually by setting up a subsidiary corporation to undertake the higher risk venture. If that venture subsequently become subject to litigation or liability, legally the subsidiary corporation would be liable and not the parent (unless the parent made guarantees, in which case the parent is liable for the guarantees it made).
★ Acquisition: When one company acquires another, the one acquired becomes a subsidiary of the acquiring company.
★ Regulation: Law may require a company to conduct certain activities through a distinct entity. Examples include banking or the operation of utilities such as electricity or telecommunications. As subsidiaries are distinct legal entities, this ensures full disclosure of the financial results of these businesses and insulates them from the other activities of their group.
★ Territoriality: A group, particularly a multinational one, may create subsidiaries in many jurisdictions simply to prevent someone else doing so to the confusion of their customers.
★ Taxation: Taxation is still largely conducted on national lines. Multinational businesses may therefore establish subsidiaries in each jurisdiction to bring together all their activities in that jurisdiction.
Control
The word "control" used in the definition of "subsidiary" is generally taken to include both practical and theoretical control. Thus, reference to a body which "controls the composition" of another body's board is a reference to control in principle, while reference to being are able to cast more than half of the votes at a general meeting, whether legally enforceable or not, refers to theoretical power. The fact that a company has a holding of less than 51% which, because the holdings of others are widely dispersed, gives effective control is not enough to give that company 'control' for the purpose of determining whether it is a subsidiary.
In Australia, for instance, the accounting standards defined the circumstances in which one entity controls another. In doing so, they largely abandoned the legal control concepts in favour of a definition that provides that 'control' is "the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity." This definition was adapted in the Australian Corporations Act 2001: s 50AA.[1]
The subsidiary can also be made with the intent to defraud the investor, and therefore a court should keep in mind as to for what reasons the subsidary has been made.
See also
★ Mergers and acquisitions
Business models which feature elements similar to subsidiaries
★ Conglomerate (company)
★ Zaibatsu
★ Keiretsu
★ Chaebol
Footnotes
{{FootnotesSmall|resize=
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