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

By Michelle Kaminsky, J.D.

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

By Michelle Kaminsky, J.D.

An existing company, or parent, can create a new company as an independent subsidiary at any time with the approval of management. A parent company may want to create a new subsidiary for many reasons, including to pursue new business avenues while limiting risk.

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Subsidiaries are independent legal entities, which means they are typically organized either as corporations or as limited liability companies (LLCs). Accordingly, the startup process for a subsidiary is the same as it would be for any company, namely drafting and filing the appropriate formation documents with the state.

The parent corporation or limited liability company (LLC) controls the new company by being its sole shareholder and retaining the exclusive right to appoint the subsidiary's board of directors.

Step 1: Authorize the formation of a subsidiary.

Call a meeting of the board of directors or other managing ownership of the existing company to vote on the formation of a subsidiary. Record the results of the vote in the meeting minutes. If the vote passes by a majority, draft a resolution memorializing the decision and have it signed by the chairman. Archive the meeting minutes and resolution in the company records.

Step 2: Choose a business entity type for the new company.

You should set up the subsidiary as either a corporation or an LLC, because these two entity types have independent legal status to establish separate liability for the two companies and an ownership structure that allows the existing company to hold all of the interest in the subsidiary.

This decision has important tax consequences, so you should consult an accountant or an attorney to make the best decision.

Step 3: Draft the company's formation document under state law.

Choose a state in which to set up the new company. Refer to the state's business statutes for instructions on how to prepare articles of incorporation for a corporation or articles of organization for an LLC.

Every state has similar requirements for these documents, which include selecting a unique name for the new company and indicating a business address and registered agent to accept official mail on behalf of the company.

Indicate in the articles that the existing company is the sole shareholder or owner of the new company and include a provision that prohibits the articles from being amended by anyone else.

Step 4: File the formation document and fee with the state.

Most states accept new business filings through the Secretary of State's office. Check the website for specific filing instructions and downloadable versions of authorized templates for articles of incorporation and organization. Include the appropriate fee with the filing.

The new company comes into existence upon acceptance of the filing by the state.

Step 5: Capitalize the new company.

Transfer assets to the subsidiary so it can start operations. This initial transfer should be in exchange for the company's ownership interest in the subsidiary.

If you want to raise capital through a private stock offering, you must follow applicable Securities and Exchange Commission (SEC) laws that govern the process.

Record the transfer in the subsidiary's accounting system by crediting the parent company's capital account.

Step 6: Draft the subsidiary's bylaws and indemnification agreement.

Bylaws provide guidance as to how the new subsidiary's internal operating procedures will work. Delineate the process the parent company will follow to appoint or change directors to the subsidiary's board, and prohibit changes to them without the parent company's permission.

You should also draft an indemnification agreement to protect management from company liabilities.

Step 7: Install an initial board of directors.

This board will manage the subsidiary as an independent entity. The parent company will continue to control the makeup of the board of directions, which also allows it to retain control over the subsidiary.

With the board installed, the parent has a fully functioning subsidiary.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.