Companies can own all or part of other companies. When you own enough equity in a company, you get to make decisions about how that company is run.
Equity can be defined as stock or any other security representing an ownership interest in a company. If 51% or more of a company's equity is owned by one party, that is called a controlling interest.
If company A owns a controlling interest in company B, company A is called the parent company and company B is its subsidiary.
For example, the Kellogg company owns a controlling interest (51% or more) in the Eggo company. So, the Eggo company is a subsidiary of the Kellogg company.
Subsidiaries, Associates, and Affiliates
Often times, a parent company will have multiple subsidiaries. In these cases, the subsidiaries are referred to as sister companies to one another.
Two subsidiaries of Kellogg company are Kashi company and Eggo. Kashi and Eggo are, therefore, sister companies to one another.
There are, of course, other types of company links. For example, if one company owns more than 20% and up to 50% equity in another company (less than a controlling interest), the second company is called an associate company.
In a situation where a parent company has associates and subsidiaries, those companies are referred to as affiliates of one another. Consequently, a company can be an affiliate of its sister companies and also of the parent company.
These terms can be quite confusing and people often use them loosely. But, the difference between them can be very important. This is because the relationship between two companies can determine, among other things, how the liabilities of one company may affect the other.
A subsidiary can be structured as a limited liability company (LLC), S-corporation, C-corporation, etc. A subsidiary can even be a nonprofit organization. But, regardless of its structure, forming a subsidiary can sometimes be very complicated.
When your company exists and operates independent of other companies, it only has to worry about its own affairs. However, when your company has one or more subsidiaries, things can be a lot more complicated.
To begin with, you must maintain separate financial records for your parent company and each of your subsidiaries. Transactions may take place within the corporate family, but each subsidiary will operate independently of the others. Furthermore, the way each subsidiary is managed may differ greatly, with various degrees of autonomy among them.
The Accounting and Tax Consequences of a Subsidiary
From an accounting perspective, a subsidiary is an independent entity and, therefore, has its own assets, liabilities, bank accounts and maintains its own financial records.
Likewise, a subsidiary is an independent entity for tax purposes. Every subsidiary has its own tax number and pays its own taxes, based on its particular business entity structure.
There are a number of advantages that come with forming a subsidiary:
Disadvantages of Forming a Subsidiary
There are also a few disadvantages to forming a subsidiary:
For more detailed information on subsidiary companies and the advantages and disadvantages of forming one Wyoming, contact an experienced Wyoming business law attorney today for a free consultation.