What is a subsidiary?

Definition and example of a subsidiary:

How subsidiaries work:

Accounting and taxes with subsidiaries:

Advantages and disadvantages of subsidiaries:

What it means for investors:

Definition and example of a subsidiary

A subsidiary is a company that is owned by a larger company, which is also referred to as the parent company or holding company. The parent company must own a controlling or majority stake in the subsidiary’s capital to have subsidiaries that it owns 100% known as “wholly-owned subsidiaries.”

How subsidiaries work

It is important to note that owning a subsidiary is different from a merger deal. In the case of a merger, the acquiring company absorbs the assets of another company and the acquired company ceases to exist as an independent entity. The merger process requires the approval of the stakeholders of the acquired company, while the purchase of a controlling stake in the company does not require the approval of its shareholders.

Accounting and taxes with subsidiaries

Companies can file a consolidated federal tax return for multiple related companies consisting of a parent company and subsidiaries that it directly or indirectly owns at least 80%. This can be beneficial for offsetting the net loss of one company with the net profit of another in the group of companies.

Advantages and disadvantages of subsidiaries

Advantages:

– Reduces risks to the parent company.

– Potential tax benefits may exist.

– Enhances understanding and cooperation among companies in the same family.

Disadvantages:

– The parent company may be legally liable for its subsidiaries.

– Complications in accounting and tax reporting.

– Leaders of subsidiaries may lack the authority to make decisions they desire.

What it means for investors

Before purchasing shares in a publicly listed company, it is wise for investors to research whether there are subsidiaries and how they perform financially.

Subsidiaries can be beneficial for the growth and overall revenue of the parent company or can negatively affect the performance of the parent company.

Source: https://www.thebalancemoney.com/what-is-a-subsidiary-5207638