A subsidiary is a company that is owned or controlled by another company, which is called the parent company, or holding company. The subsidiary can be a company, a corporation, or limited liability company. In some cases it is a government or state-owned enterprise, for example, Air India is the flag carrier airline of India, headquartered at New Delhi. It is owned by Air India Limited, a government-owned enterprise, and operates a fleet of Airbus and Boeing aircraft serving 102 domestic and international destinations. Another example is of Titan was established in 1984 as a joint venture between the Tata Group and Tamilnadu Industrial Development Corporation (TIDCO), commenced its operations in 1984 under the name Titan Watches Limited. Titan is the fifth largest integrated own brand watch manufacturer in the world. Over the last three decades, Titan has expanded into underpenetrated markets and created lifestyle brands across different product categories.
In international business management, multinational, international or global corporations can venture into new markets by way of subsidiaries which are like branches of the parent companies but which are semi-autonomous (acting independently to some extent). The subsidiary is a company registered on its own but it is owned and controlled by the mother company.
The relationship between the parent corporation and the subsidiary is to alleviate the possible remoteness of the large global organization from the immediate business environment. The subsidiary makes decisions that affect the immediate environment in which they operate; they usually fine-tune their operations, services and products to the political, economic, social, technological, ecological and legal factors (PESTLE) prevailing in their local markets. The strategic management of the global body may not be privy to such factors and so the decisions they make are likely to lose touch with the reality on the ground. For example, a number of African states had problems with the Coca-Cola Taste the Feeling advert because it was seen to fly in the face of African moral standards because it had long acts of people kissing and this was seen as inappropriate. With such kind of challenges, the subsidiaries are best suited to make decisions on such matters or to offer advice to the mother corporation.
Large organizations form subsidiaries to enter new markets, negotiate better terms with suppliers, or bypass tariffs on imports. This approach also allows them to create job opportunities in developing countries. Subsidiaries may have a different legal status than that of the holding company, and therefore, they may enjoy certain tax advantages.
Subsidiaries are a common feature of corporate life and most multinational corporations organize their operations in this way. Their global presence is felt through subsidiaries in different parts of world. Berkshire Hathaway Inc. which is a giant conglomerate and one of the world’s largest companies organizes its businesses globally with multiple subsidiaries.
POSCO India Private Limited is an Indian subsidiary of Korean conglomerate POSCO. Its parent company POSCO signed a memorandum of understanding in June 2005 with the state government of Odisha to construct a $12 billion steel plant. Hindustan Unilever Limited is a subsidiary of Unilever, a British-Dutch company. Its products include foods, beverages, cleaning agents, personal care products, water purifiers and other fast-moving consumer goods. HUL is India’s leading FMCG.
Each type of business entity falls under different regulations and has a distinct role. Business units operate independently but report to the company’s headquarters. They are big enough to have HR departments, sales teams and other support functions. An organization may have regional, national or global business units that can be further divided into several categories, depending on their role.
The primary difference between business units and subsidiary units lies in their ownership. A business unit is a department or functional area within an organization. A subsidiary is owned or controlled by another company and may have its own business units. Each business entity is subject to different regulations and tax laws and has distinct characteristics. Subsidiaries are fully or partially controlled by another organization, which is referred to as the parent or holding company. A parent company must own at least 51 per cent of the shares in a subsidiary.
When a corporation purchases less than half of another company’s stock, the latter becomes an affiliate company. An affiliated company is a relationship between companies with either one owning the other as a minority shareholder or multiple companies being owned by a third party. Companies are affiliated when one company is a minority shareholder of another. In most cases, the parent company will own less than a 50% interest in its affiliated company. For example, Bank of America has many different affiliated companies including Bank of America, U.S. Trust, Landsafe, Balboa, and Merrill Lynch.
What are the Attributes of a Subsidiary?
- A subsidiary operates as a separate and distinct corporation from its parent company. This benefits the company for the purposes of taxation, regulation, and liability. The subsidiary can sue and be sued separately from its parent. Its obligations are also typically its own and are not usually a liability of the parent company.
- The minimum level of ownership of 51% guarantees the parent company the necessary votes to configure the subsidiary’s board. This allows the parent to exercise control in company decision-making.
- Parent sub-companies need not operate in the same location, nor be in the same line of business. Subsidiaries may also have their own sub-companies; the line of succession forms a corporate group with varying degrees of ownership.
- The parent company can be larger or smaller than the subsidiary. It need not be more powerful than the subsidiary. The size of the firm or employees does not decide the relationship. The only control over ownership is the key factor.
- Also, the location or type of business of both companies does not matter. They may or may not be in the same location or same business line.
- The parent company has to register with the state registrar of the state in which the company operates. The ownership and stake details are to be defined during this process.
Advantages:
Tax benefits
A parent company can substantially reduce tax liability through deductions allowed by the state. For parent companies with multiple subsidiaries, the income liability from gains made by one subsidiary can often be counterbalance by losses in another.
Risk reduction
The parent-subsidiary framework mitigates risk because it creates a separation of legal entities. Losses incurred by a subsidiary do not readily transfer to the parent. In case of bankruptcy, however, the subsidiary’s obligations may be assigned to the parent if it can be proven that the parent and subsidiary are legally or effectively one and the same.
Increased efficiencies and diversification
In some cases, creating subsidiary silos enables the parent company to achieve greater operational efficiency, by splitting a large company into smaller, more easily manageable companies.
Types of subsidiaries
Wholly owned subsidiary
When corporation purchases 100 per cent of the stock of another company, the subsidiary is “wholly-owned.” A wholly-owned subsidiary company is not a merger.
A popular example of a wholly owned subsidiary system is Volkswagen AG, which wholly owns Volkswagen Group of America, Inc. and its distinguished brands – Audi, Bentley, Bugatti, Lamborghini (wholly owned by Audi AG), and Volkswagen.
Limited Liability Companies
Subsidiaries can be limited liability companies (LLC); it is a business structure in the United States whereby the owners are not personally liable for the company’s debts or liabilities. Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship. Facebook has sub companies such as Instagram, LLC – a photo-sharing site acquired by Facebook in April 2012 for approximately US$1B in cash and stock. Instagram remains separate in its operational management.
Management of subsidiaries
Operation
Normally, the parent company just oversees the operations of the subsidiary company. However, in certain cases, the parent company may supervise day to day operations of a subsidiary company.
Subsidiaries are separate legal entities. They have their own concerns regarding the handling of taxation, regulations and liabilities. Subsidiary companies can sue and be sued separate from the parent company. The obligations of a subsidiary may or may not be obligations of the parent company. One of these companies can be undergoing legal proceedings, bankruptcy, and tax delinquency or be under investigation without affecting other companies directly. Though affecting public image is altogether an intangible thing. Hence, forming a subsidiary protects the assets from each other’s liabilities.
The Intellectual properties remain with the subsidiaries:
The copyrights, patents, trademarks etc. of a subsidiary company stay with them until the parent shuts it down.
Voting rights
Since holding company controls the subsidiary through ownership of shares, it gets voting rights to determine the board of directors.
Accounting and Financials
Subsidiaries being an independent identity and they prepare their own financial statements. They have their own bank accounts, assets, liabilities, etc. All the transactions between the parent company and subsidiary company are to be recorded. Further, these statements are sent to the parent company.
Consolidated Accounting
The parent company aggregates and consolidates subsidiary’s transactions into its own books of accounts. According to the Securities and Exchange Commission (SEC), public limited companies should consolidate all majorly owned firms or subsidiaries to show true and fair value. The figures in profit and loss statement or balance sheet include values for both parent and subsidiary company. For example, aggregate sales, aggregate purchase, aggregated assets and liabilities.
For example, Tata Motor’s prepares consolidated financial statements including Tata Motors Limited and its subsidiaries such Jaguar Land Rover, Tata Daewoo, Tata Technologies, Tata Hispano, Tata Hitachi Construction Machineries etc. These subsidiaries are entities controlled by Tata Motors.
When a parent company does not consolidate accounts of the affiliated company, it registers the value of the stake in such an affiliate company as an asset in the balance sheet.
Unconsolidated Accounting
In rare cases, the SEC (Securities and Exchange Commission) allows this option. That is to say, when a parent company does not hold a significant stake, a subsidiary company is undergoing bankruptcy, major liquidations crises, etc.
Staffing practices
In many MNCs interdependence has increased the need for cross-border coordination in staffing. International Human Resource Practices enhance the coordination capability across national borders. It is found that the degree of interdependence is related to the level of international experience of staff employed in subsidiaries. The training and development varies depending on employee culture and standard, cross-cultural management teams are managed well on the basis of variety of employee evaluation and reward method.
