What is a subsidiary in business?
Subsidiaries play a crucial role in the growth and expansion of businesses, both large and small.
As a business owner, if you want to enter new markets or increase your presence in a particular industry, you need to understand the concept of a subsidiary.
In this article, you will understand the meaning of a subsidiary, its purpose, benefits, potential challenges, and drawbacks.
Also, you will find out how to set up and manage a subsidiary effectively, ensuring that you make the most of this valuable business tool.
Get ready to discover the world of subsidiaries and how they can help your business reach new heights.
What Is a Subsidiary? – What Is Subsidiary in Business
A subsidiary is a company that is owned or controlled by another company, referred to as the parent company or holding company.
So, the parent company holds a controlling interest in the subsidiary.
In other words, the parent company has the majority of voting rights and can make decisions on behalf of the subsidiary.
In a subsidiary structure, the parent company and the subsidiary are separate legal entities, meaning that each has its management team, employees, and assets.
However, the subsidiary operates as an independent business, but it is financially dependent on the parent company.
Hence, the parent company provides financial support and makes decisions regarding major business operations.
Subsidiaries are often established to pursue business opportunities in different markets or to take advantage of favourable tax laws in other countries.
For example, a multinational corporation might establish a subsidiary in a foreign country to sell its products and services, manufacture products locally, or access the local talent pool.
Additionally, subsidiaries can also be used to manage risk by limiting the exposure of the parent company to certain business activities.
For example, a company might create a subsidiary to operate in a high-risk market, such as a region with political instability or a high rate of crime.
So, by doing this, it will work to protect its other operations and assets.
Attributes of Subsidiary – What Is Subsidiary in Business
Several attributes define a subsidiary, including:
Subsidiaries are owned and established by the parent company.
So, ownership is usually in the form of a majority of shares or stock.
Control – What Is Subsidiary in Business
The parent company has control over the subsidiary.
Hence, this control cuts across the management and decision-making processes of the subsidiary.
The subsidiary operates independently from the parent company, with its management, employees, and operations.
However, it is still subject to the direction and control of the parent company.
Separate Legal Entity – What Is Subsidiary in Business
The subsidiary is a separate legal entity from the parent company.
Also, it has its own legal identity, separate from the parent company.
Since subsidiaries have their own management, employees, and operations, they also own their finances.
So, it doesn’t share financial statements with the parent company.
Additionally, they may have their own sources of funding.
Risks – What Is Subsidiary in Business
A subsidiary is also exposed to its own risk, just like every other business, and this risk is separate from that of the parent company.
So, it is responsible for managing those risks.
In most cases, subsidiaries do not share the same brand with their parent company.
Rather, the subsidiary can have its brand identity and may operate under a different name from the parent company.
Forms of Subsidiary Structures – What Is Subsidiary in Business
There are several different forms of subsidiary structures, including:
Wholly Owned Subsidiaries
This is a form of subsidiary structure where the subsidiary is 100% owned by the parent company.
As a result, with this form, the parent company has complete control over the subsidiary, including all decision-making power.
Majority-Owned Subsidiaries – What Is Subsidiary in Business
This is a subsidiary where the parent company owns more than 50% of the outstanding shares but less than 100%.
In other words, the parent company has significant influence over the subsidiary but may not have complete control.
This is a subsidiary in which the parent owns less than 50% of the outstanding shares.
So, the parent company has limited influence over the subsidiary and may not have control over its operations or decision-making.
Joint Ventures – What Is Subsidiary in Business
This is a subsidiary that is owned and opened jointly by two or more companies.
In other words, each company shares in the profits, losses, and management of the subsidiary.
This subsidiary exists solely to own and manage other companies.
So, a holding company may own a variety of different types of subsidiaries, including wholly-owned subsidiaries, majority-owned and minority-owned subsidiaries.
Special Purpose Subsidiaries – What Is Subsidiary in Business
This is a subsidiary created for a specific purpose.
Therefore, it can be created for holding assets, issuing bonds, or engaging in a specific business activity
Purpose of Subsidiary in Business – What Is Subsidiary in Business
The purpose of a subsidiary in business is multifaceted and can vary depending on the specific business strategy and goals of the parent company.
Some common purposes of a subsidiary include:
A company that desires to expand its business can decide to establish a subsidiary company.
This is because by establishing a subsidiary in a new market, a parent company can expand its operations into a new geographical location.
And then access new customers, and tap into new sources of revenue.
Risk Management – What Is Subsidiary in Business
A subsidiary can be used to isolate certain business activities from the parent company.
Therefore, it can be used as a means to reduce the potential impact of risk on the parent company’s financial performance.
So, this can include creating a subsidiary to operate in a politically or economically unstable region.
Legal and Regulatory Compliance
A subsidiary can be established to comply with specific legal and regulatory requirements in a foreign market.
So, this can include registering a subsidiary to operate in a country where the parent company is not yet incorporated or to comply with local regulations and tax laws.
Special Operations – What Is Subsidiary in Business
You can create a subsidiary to focus on a specific product line, business activity, or market niche.
So, this will allow your parent company to develop a specialist capability and focus on a specific area of expertise.
Access to Funding
You can also decide to establish a subsidiary to secure financing for specific business activities.
As a result, this will allow your parent company to access funding that may not be available through traditional sources.
Branding – What Is Subsidiary in Business
You can decide to establish a subsidiary to improve or develop your business, product, or service brand.
This is because,, with a subsidiary, you can develop a separate brand identity.
So, if you create one, you will be allowing your parent company to target different customer segments or, market segments with specific product offerings.
Benefits of Subsidiary – What Is Subsidiary in Business
A subsidiary is a separate legal entity that is owned or controlled by another company, known as the parent company or holding company.
There are several benefits to establishing a subsidiary, including:
The subsidiary operates as a separate legal entity.
In other words, the parent company’s liabilities are generally limited to the subsidiary’s assets and operations.
As a result of this, the parent company is protected from financial losses incurred by the subsidiary.
Flexibility – What Is Subsidiary in Business
Subsidiaries allow companies to operate in multiple countries or markets without having to set up separate legal entities in each country.
As a result, it makes it easier and more flexible for companies to enter new markets and expand their operations.
You can also create a subsidiary to get tax benefits.
This is because subsidiaries can help companies minimise their tax liability by allowing them to take advantage of lower tax rates in different countries or regions.
Local Market Knowledge – What Is Subsidiary in Business
Subsidiaries can provide local market knowledge and expertise.
Hence, this can be invaluable for companies trying to enter new markets or expand their operations.
The parent company can exert greater control over its subsidiaries.
So, this can help ensure that the subsidiaries are aligned with the parent company’s strategy and goals.
Potential Challenges of Subsidiary – What Is Subsidiary in Business
While there are several benefits to establishing a subsidiary, there are also potential challenges that you should be aware of:
Cost and Complexity
A subsidiary is not created through a small, simple process and with little money.
Rather, establishing a subsidiary can be a complex and costly process, requiring significant time and resources to set up and manage.
Legal and Regulatory Compliance – What Is Subsidiary in Business
For a subsidiary to be established and operate, it has to comply with the laws and regulations of the country in which it is located.
However, this tends to greatly consume time as it can be quite complex.
Subsidiaries located in different countries or regions may have different cultural norms, business practices, and regulations.
As a result, this can lead to communication and coordination difficulties between the parent company and the subsidiary.
Difficulty Integrating Operations – What Is Subsidiary in Business
When you start a subsidiary company, you will need to integrate the operations of a subsidiary with those of the parent company.
However, this might be difficult and require significant effort to ensure that all systems and processes are aligned.
Potential for Conflicts of Interest
Having a subsidiary company comes with a conflict of interest with its parent company.
Some of the conflicts of interest that might arise between your subsidiary company and parent company are competing for resources or disagreements over strategic direction.
Difficulty Managing Remote Operations – What Is Subsidiary in Business
In some cases, a subsidiary company is located in a different time zone or region than its parent company.
This means that the parent company will have to manage the subsidiary from a distance, and this might prove challenging for the parent company.
Potential For Cultural and Operation Differences
Different subsidiaries may have different cultures and operational practises.
This diversity can lead to difficulties in achieving a unified corporate culture and standard operating procedures.
How to Set Up a Subsidiary – What Is Subsidiary in Business
Setting up a subsidiary is not just a walk in the park.
It follows a careful process to ensure that everything is put in order.
Therefore, if you want to set up a subsidiary, you can follow these steps:
Determine the Business Purpose
There are different purposes for establishing a subsidiary company.
For instance, you may desire to establish a subsidiary for several purposes.
However, there should be one main purpose among the others.
So, focus mainly on that one and briefly on the other purposes.
By doing this, it will help guide the decision-making process and determine the type of subsidiary to be established.
Choose the Subsidiary Structure – What Is Subsidiary in Business
Subsidiary structures include a wholly-owned subsidiary, a joint venture, and a subsidiary with local partners.
Among them, you have to decide on the type of subsidiary structure to be established.
Choose a Location
The next thing for you to do is to choose a location.
A location is very important for the success of every business, including a subsidiary.
So, you need to carefully decide on the location of the subsidiary.
You should consider factors such as tax laws, business incentives, market potential, and access to resources when making your decision.
Register the Subsidiary – What Is Subsidiary in Business
Just as with other companies, a subsidiary also needs to register with the relevant government agencies and obtain any necessary licences and permits.
This process may include registering the subsidiary as a separate legal entity, obtaining tax identification numbers, and registering for any necessary taxes.
You have to do all these things to ensure you can legally operate your subsidiary
Establishing a subsidiary requires financial funds and resources.
Without financial funds, you will not be able to get the resources and assets that will build and grow that business.
So, you need to ensure that you obtain financing for the subsidiary.
This may include investments from the parent company, loans from banks or other financial institutions, or a combination of both.
Get Employees –What Is Subsidiary in Business
You need to consider the people who will be working in your subsidiary.
This is because your subsidiary cannot be fully managed by the parent company and also because it is a separate business entity.
So, you need to hire new employees for your subsidiary.
Also, you can consider transferring some of the employees from the parent company to the subsidiary.
However, you need to be sure that their positions in the parent company are or will be effectively filled.
Doing this will help you easily cultivate the company culture of the parent company in the subsidiary business.
Develop a Business Plan
Your subsidiary company needs a business plan to succeed.
So, you will need to develop a detailed business plan for the subsidiary.
It should include its goals, strategies, and operational plans.
Integrate Operations with the Parent Company – What Is Subsidiary in Business
You will need to integrate the operations of the subsidiary with those of the parent company.
This will ensure that all systems and processes are aligned and that there is a clear line to communicate between the two entities.
When you do this, it will be easier to manage both the parent and subsidiary companies.
How to Effectively Manage a Subsidiary – What Is a Subsidiary in Business
Managing a subsidiary effectively requires a strategic approach that takes into account the unique characteristics and needs of each subsidiary.
Here are some steps that can help:
Define Clear Goals and Objectives
Start by defining clear goals and objectives for the subsidiary.
While doing this, you should take into account the subsidiary’s role in the overall company strategy.
Everyone involved will align and work towards the same targets with the help of this.
Establish Clear Lines of Communication – What Is Subsidiary in Business
Establish clear lines of communication between the subsidiary and the parent company.
You need to ensure that a clear line of communication is strong within and between different departments within the subsidiary.
Perform regular check-ins and record progress.
This will ensure that everyone is on the same page.
Empower Local Management
Give the local management team the autonomy and resources they need to make decisions and take action.
Trust and empower them to manage the subsidiary effectively while still providing support and guidance when needed.
Foster a Strong Corporate Culture – What Is Subsidiary in Business
Foster a strong corporate culture that aligns with the values and goals of the parent company.
Additionally, it encourages the sharing of best practices and ideas between the subsidiary and the parent company.
Ensure Compliance with Regulations and Standards
Rules and regulations guide the type of subsidiary business you are operating.
Therefore, if you fail to comply with them, it can lead to legal issues for your subsidiary.
So, you need to ensure that the subsidiary complies with all relevant regulations and standards, such as local labour laws, tax regulations, and health and safety standards.
Monitor Performance and Provide Support – What Is Subsidiary in Business
Another thing you need to do is regularly monitor the subsidiary’s performance.
This includes financial metrics and key performance indicators.
Additionally, ensure that you provide support and resources as needed to help the subsidiary reach its goals.
Encourage Innovation and Adaptation
Your subsidiary has to work alone at some point to grow and aid in achieving the goals of the parent company.
So, for this to happen, it needs to be innovative and adaptive and take advantage of new opportunities and challenges as they arise.
Therefore, you need to ensure that you encourage innovation and adaptation.
Evaluate and Adjust Strategies Regularly – What Is Subsidiary in Business
You also need to regularly evaluate the effectiveness of the subsidiary’s strategies and make adjustments as needed.
So, this is to ensure that it remains aligned with the overall company strategy and can achieve its goals and objectives.
Conclusion on What Is Subsidiary in Business
The parent company owns or controls a separate and distinct business entity known as a subsidiary.
It operates under the direction and control of the parent company but has its own management, team, employees, and assets.
Subsidiaries can play a key role in the growth and expansion of a company, helping it enter new markets, access new resources, and tap into new opportunities.
However, managing a subsidiary effectively requires a strategic approach that takes into account the unique needs and characteristics of each subsidiary and the overall goals and objectives of the parent company.
When you have understood the role and purpose of subsidiaries in business, you will make informed decisions about how to use them to grow and achieve goals.