Understanding Subsidiaries in Business
A subsidiary is a separate legal entity that’s owned or controlled by another company, often referred to as the parent company. Through this legal arrangement, the parent company can benefit from the subsidiary’s profits, investments, and joint ventures.
Subsidiaries give companies the flexibility to expand and diversify into new markets without having to commit their main assets. They also allow the central company to insulate certain business operations from the potential liabilities of those subsets.
Subsidiaries may be created by starting a new business, buying a controlling share of an existing business, or merging with an existing company. There are various types of subsidiaries that can be formed, based on the control the parent company has over them. Common types of subsidiaries are wholly-owned, partially-owned, joint venture, and associated.
Setting Up a Subsidiary
Starting a subsidiary requires an understanding of the company’s goals and objectives, the legal and financial considerations, as well as the process involved. Companies should also seek professional legal and financial advice when setting up a subsidiary.
Establishing a subsidiary requires securing the right resources to do it, such as formal organizational documents. Companies must define the subsidiary’s mission and purpose, choose an appropriate name, and document organizational actions such as appointing officers and directors.
Companies may need to contact local authorities, register and file documents, and obtain the necessary licenses and permits. Business structures and resources such as offices, accounts, and personnel may need to be established or transferred from the parent company.
Legal and Financial Implications of Subsidiaries
Subsidiaries have both legal and financial implications for the parent company due to the fact that they are separate legal entities. The parent company may be exposed to both financial risks and other liabilities from its subsidiaries.
For instance, if a subsidiary has taken out a loan, the parent company may be held liable if the subsidiary defaults. It’s important for companies to understand the legal nature of subsidiaries and seek professional advice when assessing the risks associated with them.
The parent company may also be responsible for any legal disputes or disagreements involving its subsidiaries. Furthermore, the parent company may be required to comply with regulations governing subsidiaries in the countries in which they operate.