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

By Terry Masters

An existing company, or parent, can create a new company as an independent subsidiary at any time with the approval of management. The startup process is the same for the company as it would be for an individual business owner. The parent controls the new company by being its sole shareholder and retaining the exclusive right to appoint the subsidiary's board of directors. Corporations are the most common type of entity that will find it useful to form a subsidiary, but it is also feasible for a limited liability company to own another business entity. Subsidiaries are formed as independent legal entities, which means they are typically organized as either corporations or LLCs.

Step 1

Authorize the formation of a subsidiary. Call a meeting of the board of directors or other managing ownership of the existing company. Vote on the formation of a subsidiary and 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. The subsidiary should be set up 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. Consult an accountant or an attorney to make the best decision.

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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 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 a 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 with the state business registrar. Most states accept new business filings through the secretary of state's office. Check the secretary's 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. Record the transfer in the subsidiary's accounting system by crediting the parent company's capital account.

Step 6

Draft the subsidiary's bylaws. Indicate the procedure that the parent company, as the sole owner, will follow to appoint or change directors to the subsidiary's board. Prohibit changes to the bylaws without the permission of the parent company as the sole owner.

Step 7

Install an initial board of directors. The board will manage the subsidiary as an independent entity. Control of the subsidiary is maintained by the parent's continued control of the composition of the board of directors. Once the board is installed, the parent has a fully functioning subsidiary.

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How Do I Create an LLC Subsidiary?

Owners of companies with multiple departments and diverse investments may benefit from setting up a parent-subsidiary structure with multiple LLCs. By spreading a company's assets across different business entities, the company reduces the risks of losing its assets in the event of a large claim. This is because claims are limited to the assets the individual LLC possesses; the assets of parent or subsidiary LLCs are, in effect, shielded from the judgment. Forming a subsidiary LLC is as straightforward as forming the original LLC.

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 corporation, the owners of an LLC are not personally liable for the debts of the business. Unlike corporations, however, LLCs do not pay corporate income tax and don't have shareholders or a board of directors. Owners of an LLC have the option to set up the business in any way that suits their purpose, which includes the option to create subsidiary companies under the LLC.

Incorporating Vs. LLC

One of the most important initial decisions in starting a business involves deciding what type of business entity your new venture should be. Two options are corporations and limited liability companies, or LLCs. There are distinct advantages and disadvantages to each type with respect to personal control, taxation and personal liability.

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