The Advantages of a Subsidiary Corporation

By John Green

A subsidiary is a separate legal entity owned in whole or in part by another entity. Common forms include limited liability companies, C corporations and even nonprofits. Creating a subsidiary can be more complex than simply maintaining a single organization. It involves incorporating multiple organizations, maintaining separate financial records and even conducting arm's length transactions among entities within a single corporate family. Nonetheless, subsidiaries offer substantial strategic advantages.

A subsidiary is a separate legal entity owned in whole or in part by another entity. Common forms include limited liability companies, C corporations and even nonprofits. Creating a subsidiary can be more complex than simply maintaining a single organization. It involves incorporating multiple organizations, maintaining separate financial records and even conducting arm's length transactions among entities within a single corporate family. Nonetheless, subsidiaries offer substantial strategic advantages.

Limiting Liability

Perhaps the most common reason cited for forming a subsidiary is limited liability. Provided that the parent and its subsidiaries respect corporate formalities, it is possible to limit a parent company's potential losses by using subsidiaries as a liability shield. For example, in the movie industry, it is common for each film to be made through its own corporate entity, which can protect the parent company from losses due to lawsuits resulting from a particular production.

Ready to incorporate your business? Get Started Now

Separate Management

A subsidiary provides a legal structure for dividing a business into discrete entities with separate management. For example, in a multinational conglomerate, subsidiaries provide a structural way to adapt to local institutional culture and legal requirements. It can also be a means of accommodating different incentive structures, such as linking executive pay to the economic performance of a particular company or using both for-profit and nonprofit subsidiaries within a tax-exempt university or hospital.

Identity and Branding

A subsidiary provides a structural framework for diversifying corporate identity. Within a conglomerate it is possible to maintain the integrity of discrete brand identities through separate subsidiary enterprises, such as the way The Gap, Inc. uses Gap, Old Navy, Banana Republic and Piperlime to target different segments of the fashion market.

Tax Treatment

As Randy Myers notes in his Journal of Accountancy article, "Is a Subsidiary in Your Future?", tax considerations can play a major role in the decision to form a subsidiary. For example, Myers explains, a company can benefit from using subsidiaries in a state such as Pennsylvania or Michigan, where a subsidiary is taxed only on in-state profits rather than on all of the profits generated by the company nationwide. Likewise, an international business can form a foreign subsidiary to take advantage of lower tax rates in another country. Creating a subsidiary is also useful for nonprofit organizations, which use subsidiaries to preserve their tax exemption by separating unrelated business activity from for-profit commercial ventures.

Saleability

Structured properly, a subsidiary can be used to attract additional investors, reduce regulatory requirements for certain transactions, facilitate tax-free mergers or sell a line of business. As a result, using a subsidiary to spin off a particular venture can be an effective and profitable way to maximize shareholder value.

Ready to incorporate your business? Get Started Now
Parent LLC Vs. Stand-Alone LLC

References

Resources

Related articles

Can I Have Many Businesses Under My Corporation?

A corporation is an independent legal entity that is formed under state law. It has an existence that is separate from its shareholders and has many of the same rights and privileges as a person under the law. These include owning property and investments, such as shares in other businesses. There is no limit on how many businesses a corporation can own.

How to Form an Umbrella Corporation

A corporation is a legal entity formed under state law that has an identity separate from its owner-shareholders. An umbrella corporation is a standard corporation that owns and controls one or more subsidiary corporations. A subsidiary is a corporation that is at least majority-owned by another corporation — in this case, an umbrella or parent corporation.

What Is the Difference Between a Nonprofit and a Mutual-Benefit Corporation?

When you think of a "nonprofit," you likely envision an organization that provides a public service, such as feeding the hungry, and accepts tax-deductible donations. However, this is only one type of nonprofit entity. A mutual-benefit nonprofit is a type of nonprofit corporation that works for the betterment of a select group of members, rather than for the benefit of the public.

LLCs, Corporations, Patents, Attorney Help

Related articles

How to Start a Conglomerate Corporation

A corporation's status as a conglomerate comes from the way the corporation operates, not the way it is formed. A ...

Can More Than One Business Be Conducted Under One LLC?

A limited liability company, or LLC, is a common and flexible legal structure that is formed under state law. Like a ...

Definition of Nonprofits vs. For Profits

Nonprofit and for-profit organizations are separated by more than just revenue goals. For-profit organizations are run ...

How to Create a New Company or Subsidiary of an Existing Company

An existing company, or parent, can create a new company as an independent subsidiary at any time with the approval of ...

Browse by category