Subsidiary - Wikipedia
A subsidiary, subsidiary company or daughter company is a company that is owned or Also, because a parent company and a subsidiary are separate entities, it is entirely management or supervisory body of another undertaking ( a subsidiary in relation to the financial and operating policies of another entity so as to. A holding company is a parent company that has control over a subsidiary company. The parent-subsidiary relationship has various legal and financial implications for that affect the management and financials of the subsidiary company. This will assess the relationship between parent and subsidiary entities as to file for voluntary administration and close its United Kingdom doors on the same .
Legally this is a better option than overruling or dictating to them. Parental Power There are ways for the parent company to keep tight control without violating the subsidiary's independence.
The power to hire and fire the board is a crucial one, but it can be made stronger. With a new subsidiary, for example, the parent, as owner, can draft the articles of incorporation, including certain provisions to solidify control: The parent company can place its own directors on the subsidiary board but this has drawbacks.
It's harder to make good decisions when serving two masters. If the subsidiary gets sued, shared directors might be used to prove the subsidiary isn't really independent. Liability One reason corporations set up subsidiaries is to protect themselves legally. If the subsidiary stays independent, the parent isn't liable for any negligent or criminal acts on the subsidiary's part.
However, the law does allow for exceptions: There's no real independence. The subsidiary and the parent share a common bank account, use shared marketing materials or the subsidiary does business under the name of the parent entity. The subsidiary is insolvent. Some parent companies try to duck liability by creating a subsidiary with no legal assets, so it can't pay any damages or fines.
Judges frown on this. Details[ edit ] Subsidiaries are separate, distinct legal entities for the purposes of taxationregulation and liability. For this reason, they differ from divisionswhich are businesses fully integrated within the main company, and not legally or otherwise distinct from it.
However, creditors of an insolvent subsidiary may be able to obtain a judgment against the parent if they can pierce the corporate veil and prove that the parent and subsidiary are mere alter egos of one another, therefore any copyrights, trademarks, and patents remain with the subsidiary until the parent shuts down the subsidiary.
What Is a Parent Company Subsidiary Relationship?
One of the ways of controlling 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. 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 corporate groupalthough this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership.
The Relationship Between a Company & Its Subsidiary
A parent company does not have to be the larger or "more powerful" entity; it is possible for the parent company to be smaller than a subsidiary, such as DanJaqa closely held family company, which controls Eon Productionsthe large corporation which manages the James Bond franchise. Conversely, the parent may be larger than some or all of its subsidiaries if it has more than oneas the relationship is defined by control of ownership shares, not the number of employees.
The parent and the subsidiary do not necessarily have to operate in the same locations or operate the same businesses. Not only is it possible that they could conceivably be competitors in the marketplace, but such arrangements happen frequently at the end of a hostile takeover or voluntary merger. Also, because a parent company and a subsidiary are separate entities, it is entirely possible for one of them to be involved in legal proceedings, bankruptcy, tax delinquency, indictment or under investigation while the other is not.
Tiered subsidiaries[ edit ] In descriptions of larger corporate structures, the terms "first-tier subsidiary", "second-tier subsidiary", "third-tier subsidiary" etc. The ownership structure of the small British specialist company Ford Component Sales, which sells Ford components to specialist car manufacturers and OEM manufacturers, such as Morgan Motor Company and Caterham Cars illustrates how multiple levels of subsidiaries are used in large corporations: