What Is a Subsidiary Company?

In the corporate world, a subsidiary is a business entity that is owned in part or whole by a di🌸ffer🅠ent company.

The company with the controlling share is known as the 澳洲幸运5官方开奖结果体彩网:parent company or the 澳洲幸运5官方开奖结果体彩网:holding company. The parent company owns or controls more than half of the su💖bsidiary's stock.

In cases where a subsidiary is 100% owned by its parent company, the subsidiary is referred to as a 澳洲幸运5官方开奖结果体彩网:wholly-owned subsidiary.

How a Subsidiary Company Works

Subsidiaries are separate and distinct legal entities from their parent companies, which is🦄 reflected in the independence of their liabilities, taxation, and governance.

However, given their controlling interest, parent companies often have 澳洲幸运5官方开奖结果体彩网:considerable influence over their su𓆏bsidiaries.

They—along with other subsidiary shareholders, if any—vote to elect a subsidiary company's board of directors, and there may often be a board-member overlap between a subsidiary and its parent company.

Subsidiary Company Financials

A subsidiary usually prepares its own, independent financial statements. Typically, these are sent to the parent company, which will aggregate them—as it does financials from all of its operations—and carry them on its 澳洲幸运5官方开奖结果体彩网:consolidated financial statements.

In contrast, an associate company's financials are not combined with the parent company's. Instead, the parent company registers the value of its stake in the associate company as an asset on its 澳洲幸运5官方开奖结果体彩网:balance sheet.

Accounting standards generally require that public com♋panies consolidate in their records all majority-owned subsidiaries.꧟

澳洲幸运5官方开奖结果体彩网:Consolidation is viewed as a more meaningful method of accounting than separate financials for a parent company and each of its subsidiaries.

Unconsolidated Subsidiary

An 澳洲幸运5官方开奖结果体彩网:unconsolidated subsidiary is a subsid🌊iary with financials that are not included inꦑ its parent company's statements.

Ownership of unconsolidated subsidiaries is typically treated as an equity investment and denoted as an asset on the parent company's balance sheet.

For regulatory reasons, unconsolidated subsidiaries are generally those in which a parent company does not have a significant stake.

Subsidiary Company Advantages and Disadvantages

Advantages

• Buying an interest in a subsidiary usually requires a smaller investment by the parent company than a merger would. Also unlike a merger, shareholder approval is not required to purchase or sell a subsidiary.
• A parent company buys or establishes a subsidiary to obtain specific 澳洲幸运5官方开奖结果体彩网:synergies, such as a more diversified product line or assets in the form of earnings, equipment, or property.
• Subsidiaries can be the experimental ground for different organizational structures, manufacturing techniques, and types of products.
• In addition, subsidiaries can contain and limit problems for a parent company to some extent in the event of lawsuits, with the subsidiary serving as a kind of liability shield. Entertainment companies often set up individual movies or TV shows as separate subsidiaries for this reason.

Disadvantages

• Aggregating and consolidating a subsidiary's financials can make the parent company's accounting more complicated.
• Since subsidiaries must remain independent to some degree, transactions with the parent company may have to be "澳洲幸运5官方开奖结果体彩网:at arm's length," and the parent company might not have all of the control it wants.
• Additionally, while a subsidiary can help shield the parent company from certain legal problems, the parent company may still be liable for criminal actions or corporate malfeasance by the subsidiary's management or other personnel.
• Finally, the parent company may have to guarantee the subsidiary's loans, leaving it exposed to financial losses.

Examples of Subsidiary Companies 

Public companies are require𒅌d by the SEC to disclose significant subsidiaries.

Warren Buffett's 澳洲幸运5官方开奖结果体彩网:Berkshire Hathaway Inc., for example, has a long and diverse list of subsidiary companies, including International Dairy Queen, Inc., Clayton Homes, Business Wire, GEICO, and Helzberg Diamonds.

Berkshire Hathaway's acquisition of many diverse businesses follows Buffett's oft-discussed strategy of buying 澳洲幸运5官方开奖结果体彩网:undervalued assets and holding onto them.

In return, acquired subsidiaries often continue to operate independently w𒉰hile gaining acc🌄ess to broader financial resources. 

Like Berkshire Hathaway, 澳洲幸运5官方开奖结果体彩网:Alphabet Inc. has many subsidiaries🍌, the best known of which is Google.

These separate business entities all perform unique operations intended to add value to Alphabet through diversification, revenue, earnings, and 澳洲幸运5官方开奖结果体彩网:research and development (R&D).

The Bottom Line

A subsidiary is a company that is completely or partially owned by another company. Acquiring and establishing subsidiaries is fairly common among publicly-traded companies, especially in industries like tech and 澳洲幸运5官方开奖结果体彩网:real estate.

The advantages of subsidiaries include tax benefits, increased efficiencies, and diversification. Drawbacks inclꦦude limited control, greater bureaucracy and potential legal costs.