In contrast, if the parent holds 20%-50% of the voting stock of another company, that company is referred to as an associate company. Another reason may be to preserve the brand and identity in of the wholly owned subsidiary. In the case of a subsidiary company structure, financial statements of the subsidiary are merged with the parent’s statements and the consolidated financial statements are furnished along with standalone results in the audited financials of the parent. A subsidiary is a separate legal entity, while a branch or division is a part of a company that is not considered to be a separate entity. U.S. Securities and Exchange Commission. The control is exerted through ownership of more than 50% of the voting stock of the subsidiary. As per regulations, parent companies are required to consolidate all subsidiary financials. A subsidiary company is a company that is completely or partially owned by another company, which may be a parent company that also has business operations or a holding company whose sole purpose is to own its subsidiaries., The holding or parent company must own more than 50% of the subsidiary company. Subsidiary: (noun) a company whose controlling interest is owned by another company Now that you’re well-versed in the lingo. Companies can become subsidiaries by being acquired. However, there is a case when the parent has an influence on the subsidiary but does have the majority voting power. They are independent in terms of their liabilities, taxation, and governance. A subsidiary produces its own financial statements and may file its own tax return. Growing businesses usually establish subsidiaries or purchase controlling stake in existing companies since this gives them the benefit of expanding their business at minimal risk. A subsidiary may also be its own separate entity for taxation purposes. The Walt Disney company has more than 50 subsidiaries. Having a subsidiary may be important for a variety of tax and tariff reasons. In order to become a wholly-owned subsidiary, the parent company ABC needs to acquire the 1% minority shares from the public to gain full control over the operations of the company. The parent-subsidiary relationship helps in locking the liabilities and credit claims of the subsidiary company structure, keeping the parent’s assets safe. What Is the Difference Between a Public Company and Private Company? Instagram is a photo-sharing application acquired by Facebook in April 2012. Any company which is completely owned by another company such as a parent or holding company is known as a wholly owned subsidiary. For example, the subsidiary may be located in a country different from that of the parent company. This helps to increase market share and gain competitive advantage through economies of scale. The rationale for doing this is to protect the assets of the various properties from each other's liabilities. It has various subsidiaries acquired from time to time. All intragroup balances, transactions, income, and expenses are eliminated during consolidation. Series LLC - Is it Right for Your Business? This could give a misleading interpretation of low multiple which could categorize the holding company stock as undervalued. Thus, a subsidiary company structure can sue and be sued separately from its parent. 6 YouTube is, in turn, a subsidiary of Google. Most holding companies' sole purpose is to hold ownership of subsidiaries. Each subsidiary has its own employer identification number and may pay its own taxes, according to its business type., However, many public companies file consolidated financial statements, including the balance sheet and income statement, showing the parent and all subsidiaries combined. "Google Inc. Form 8-K Filing Dated Aug. 15, 2015." You may also learn more about Corporate Finance for the following articles –, Copyright © 2020. Alphabet. What Are Horizontal and Vertical Mergers? Jean Murray, MBA, Ph.D., is an experienced business writer and teacher.