To be a subsidiary, another company must hold more than 50% of its shares. If it is a wholly-owned or directly owned subsidiary, another corporation owns 100% of its shares. Regardless of the percentage of ownership, a subsidiary must be a separate entity and not just a division of a company operating under a separate name. A legal person may enter into contracts and assume obligations arising from such contracts, assume and pay debts, sue and be appointed by other parties in legal actions and may be held liable for the results of such actions. This is the American scene in a nutshell, but it is not entirely indicative of business practices in other parts of the world. Let`s take a look at the importance of legal entities in other jurisdictions. But what does a legal entity mean and why is it so important to compliance and legal operations teams? For example, a wholly-owned subsidiary may be located in a country other than that of the parent company. The subsidiary most likely has its own management structure, products and customers. A wholly-owned subsidiary can help the parent company maintain operations in different geographies and markets or in distinct industries. These factors help protect against market changes or geopolitical and business practices, as well as declines in industrial sectors. At first glance, it appears that the advantages of a parent company with full control over its subsidiary, as is the case for a wholly/direct subsidiary, would outweigh if it were satisfied with a majority shareholding in a subsidiary.
However, there are cases where it is advantageous for a company to have an indirect subsidiary. The difference between a subsidiary and a wholly-owned subsidiary is the extent of control held by the parent company. A parent company holds a controlling interest in another company, which means that it has a majority interest in that company and controls its operations. A parent company holds between 51% and 99% of the voting shares of a common subsidiary. If a parent company owns 100% of the shares, the subsidiary is called a wholly-owned subsidiary. The subsidiary also needs a board of directors to run the company. As described above, the parent company determines who sits on the board of directors an agreement that allows the parent company to retain control of the subsidiary. However, the creation of a wholly-owned subsidiary may cause the parent company to overpay for assets, especially if other companies bid on the same company. In addition, building relationships with local suppliers and customers often takes time, which can hinder the company`s business operations. Cultural differences can become an issue when hiring employees for a foreign subsidiary. Because they are independent legal entities, subsidiaries are usually structured as corporations or limited liability companies (LLCs) and require the same incorporation procedures as any other new company.
As the sole shareholder of the subsidiary, the parent company controls the newly created company and has exclusive rights to appoint its board of directors. The decisive factor in determining whether a subsidiary of an entity is an indirect subsidiary is that, although the parent company does not have full control of the subsidiary (as in the case of a wholly or direct subsidiary), it has a sufficient interest in the entity to influence the activities of the subsidiary. A good example of an indirect subsidiary is what can happen in a joint venture if one of the companies covered by the trade agreement owns more than 50% of the shares of the newly formed company. As you can see, while the meaning of a legal entity does not technically change in different jurisdictions, the form and types of legal entity may be different and have different implications for compliance and governance. An example of a parent-daughter relationship is CNN, which has established a subsidiary in the Philippines. CNN has not been able to set up a wholly-owned company in the Philippines because its constitution prohibits full foreign ownership of any form of media. The solution was to work with the new owners of a TV station that was about to close. The new owners were aware of the fierce competition from broadcast media in the country, which is dominated by two giants. The solution was to reach a new niche by rebranding itself as a local news network that served as CNN`s affiliate. Here are the steps to create a subsidiary. A legal entity is a corporation or organization that has legal rights and obligations, including tax returns. It is a company that can contract as a seller or supplier and can sue or be sued.
Compliance and legal operations teams must approach the management of these entities from an entity governance perspective. This means keeping a strategic eye on all business requirements and being able to predict the downstream effects of changes in regulations or responsibilities. Not to be confused with a subsidiary, a wholly-owned subsidiary is a company that operates as an independent legal entity and whose shares are 100% owned by a holding company/parent company. A popular example of a wholly-owned subsidiary system is Volkswagen AG, which owns Volkswagen Group of America, Inc. and its respected brands Audi, Bentley, Bugatti, Lamborghini (wholly owned by Audi AG) and Volkswagen. An indirect subsidiary explains the relationship between a parent company and its subsidiaries when the subsidiary is not wholly owned.3 min read There are about 15 types of legal entities in the United States that require different variations of documents for legal entities. However, the most common legal structures you can choose from are: Here`s a global tour of legal entities, beyond the U.S. perspective: Properly forming a subsidiary can allow you to grow your business while minimizing risk to the parent company and allowing both companies to succeed.
If the subsidiary has valuable proprietary technology, the parent company may attempt to convert the company into a wholly-owned subsidiary in order to have sole control of the subsidiary`s technology. This could give the parent company a competitive advantage over its competitors. Since the parent company owns all the shares of a wholly-owned subsidiary, there are no minority shareholders. The subsidiary operates with the authorization of the parent company, which may or may not have a direct influence on the operations and management of the subsidiary. This can make it an unconsolidated subsidiary. A wholly-owned subsidiary is a corporation whose common shares are 100% owned by another company, the parent company. While a company may become a wholly-owned subsidiary through an acquisition or spin-off of the parent company, a regular subsidiary is 51% to 99% owned by the parent company. A subsidiary is a separate legal entity for tax, regulatory and liability purposes.
Parent companies can benefit from owning subsidiaries because they can acquire and control companies that manufacture the components needed to manufacture their products.
