Josephine Norton
A subsidiary is a company that is owned or controlled by another company, known as the parent company or holding company. The parent company holds a controlling interest in the subsidiary, meaning it owns more than half of its stock. The subsidiary is a separate legal entity from the parent company, with its own management team and CEO. The two entities should have different bank accounts, tax numbers, and operations. This means they will have different accounting records and books. The parent company has significant influence over its subsidiary but does not exercise full control. When a parent company has full control over a subsidiary, it must record its investment using a consolidation method. When it has significant influence but not full control, it uses the equity method of accounting.
| Characteristics | Values |
|---|---|
| Definition | A subsidiary is a company that belongs to another company, which is usually referred to as the parent company or holding company. |
| Ownership | The parent company holds a controlling interest in the subsidiary company, owning more than 50% of its stock. |
| Legal Status | Subsidiaries are separate and distinct legal entities from their parent companies, with independent liabilities, taxation, and governance. |
| Financial Reporting | A subsidiary's financials are reported on the parent's consolidated financial statements. The parent company aggregates the subsidiary's financials with its own. |
| Decision-Making | While subsidiaries have their own management and CEO, the parent company has a significant say in who runs the company and sits on its board of directors. |
| Advantages | Companies establish subsidiaries to obtain specific synergies, assets, and tax advantages, as well as to contain and limit losses. |
| Disadvantages | Subsidiaries can lead to increased complexity in decision-making, financial reporting, and paperwork for the parent company. The parent may also be liable for the subsidiary's actions and debts. |
What You'll Learn
- A subsidiary is a company that is more than 50% owned by a parent company
- A subsidiary is a separate legal entity from its parent company
- Shareholder approval is not required to turn a company into a subsidiary
- A subsidiary's financials are reported on the parent company's consolidated financial statements
- Equity funds are a type of investment fund that pools money from investors
A subsidiary is a company that is more than 50% owned by a parent company
A subsidiary is a company that is separate from and controlled by another company, known as the parent company or holding company. This control is achieved when the parent company owns more than 50% of the subsidiary's stock, giving it a controlling share. This allows the parent company to exert influence over the subsidiary's operations, including governance and overall business strategy.
The subsidiary and the parent company are considered distinct legal entities, with separate liabilities, taxation and governance. This means that the subsidiary must follow the laws of the country in which it is incorporated and operates. This is particularly relevant if the subsidiary is based in a foreign country.
The subsidiary usually prepares independent financial statements, which are then sent to the parent company to be aggregated and carried on its consolidated financial statements.
A subsidiary can be wholly owned (100%) by the parent company, or it can be a normal/partially owned subsidiary, where the parent company owns more than half of the common stock. In the latter case, the subsidiary will have multiple shareholders who can influence its operations.
The creation of subsidiaries offers several advantages, including tax benefits, reduced risk, increased efficiency and diversification. However, there are also some drawbacks, such as limited control, greater bureaucracy and more complex financial statements.
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A subsidiary is a separate legal entity from its parent company
A subsidiary is a company that is owned or controlled by another company, which is usually referred to as the parent company or holding company. The parent company usually owns more than 50% of the subsidiary company, giving it a controlling share.
The subsidiary must follow the laws of the country in which it is incorporated and operates. The parent company can influence the subsidiary's operations, including governance and overall business strategy. The parent company can elect the board of directors and there may be a board member overlap between the two companies.
The two companies are considered separate for tax, regulation and liability reasons. This means that the subsidiary can take advantage of more favourable corporate tax rates compared to the parent company. The subsidiary can also be liable for its own debts and obligations, protecting the parent company from liabilities.
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Shareholder approval is not required to turn a company into a subsidiary
The process of turning a company into a subsidiary involves acquiring or establishing a new company. This can be done through a merger or acquisition, or by setting up a new company. In the case of a merger, the target company merges into the acquiring company, and the shareholders of the target company become shareholders of the acquiring company. This requires shareholder approval and follows specific legal procedures.
On the other hand, acquiring a company involves purchasing the assets or stock of the target company. Shareholder approval may be required, depending on the structure of the deal and the governing documents of both companies. If the acquiring company purchases the assets of the target company, it is not required to assume the target company's liabilities. However, if the acquiring company purchases the stock of the target company, it assumes ownership and control, including any liabilities.
Establishing a new company as a subsidiary does not require shareholder approval. The parent company can set up a new subsidiary as a separate legal entity, allowing it to operate independently while still maintaining control over its operations. This can be a complex process, involving regulatory and legal considerations, especially if the subsidiary is established in a foreign country.
Overall, while shareholder approval is often necessary for mergers and acquisitions, it is not a requirement for turning a company into a subsidiary. The specific process and requirements depend on the structure of the deal and the laws governing the companies involved.
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A subsidiary's financials are reported on the parent company's consolidated financial statements
A subsidiary is a company that is owned or controlled by another company, which is known as the parent company or holding company. The parent company holds a controlling interest in the subsidiary, meaning it owns more than half of its stock. A subsidiary is considered a wholly owned subsidiary when it is 100% owned by the parent company.
A subsidiary is a separate and distinct legal entity from its parent company, with its own liabilities, taxation, and governance. However, the parent company has considerable influence over its subsidiaries, including voting to elect the subsidiary's board of directors.
A subsidiary's financials are typically reported on the parent company's consolidated financial statements. Consolidated financial statements present the assets, liabilities, income, revenue, expenses, and cash flows of the parent company and its subsidiaries as a single entity. The parent company aggregates the financial statements of its subsidiaries and carries them on its consolidated financial statements.
The Securities and Exchange Commission (SEC) states that majority-owned subsidiaries should be consolidated, except in rare cases such as when a subsidiary is undergoing bankruptcy. Accounting standards generally require that public companies consolidate all majority-owned subsidiaries.
The consolidated method combines the financial statements of the parent and subsidiary into one set, eliminating any overlapping transfers, payments, and loans. This method is preferred when the parent company owns a higher percentage of the subsidiary, typically more than 50%.
The equity method is another approach to subsidiary accounting, where the investor reports its proportionate share of the subsidiary's equity as an investment. This method is typically used when the investor has significant influence over the subsidiary but does not exercise full control, owning between 20% to 50% of the subsidiary's shares or voting rights.
The choice between the consolidated and equity methods depends on the level of ownership and control the parent company has over the subsidiary. The consolidated method is generally used when the parent company has a higher level of ownership and control, while the equity method is used when the parent company has significant influence but does not have full control.
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Equity funds are a type of investment fund that pools money from investors
Equity funds pool money from multiple investors, allowing individuals to benefit from economies of scale and access investment opportunities typically available only to large institutional investors. By investing in a wide range of stocks across different sectors and industries, equity funds help mitigate the risks associated with investing in individual stocks. For example, if one stock in an equity fund underperforms, the impact on the overall fund performance is reduced due to the diversification of the portfolio.
Actively managed equity funds have portfolio managers who actively research, analyse, and select stocks with the goal of outperforming a benchmark index. The success of these funds depends largely on the fund manager's skill and decision-making ability. On the other hand, passively managed funds, such as index funds, aim to replicate the performance of a specific market index without attempting to outperform the market.
Equity funds can be categorised in several ways, including investment style, portfolio focus, and level of diversification. They are often classified based on the size of the companies they invest in, such as large-cap, mid-cap, or small-cap funds. Additionally, equity funds can be growth or value-oriented, investing in companies with expected high growth or undervalued stocks, respectively.
When investing in equity funds, it is important to consider factors such as investment objectives, risk tolerance, and time horizon. Investors should also conduct thorough research and due diligence when selecting equity funds, evaluating factors like the fund's investment strategy, management team, historical performance, and associated fees.
In summary, equity funds offer a convenient way for investors to gain exposure to a diversified portfolio of stocks, with the potential for higher returns than other asset classes. However, it is crucial to understand the risks and carefully consider investment goals before investing in equity funds.
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Frequently asked questions
A subsidiary is a company that is owned or controlled by another company, which is known as the parent company or holding company. The parent company holds a controlling interest in the subsidiary, meaning it owns or controls more than half of its stock.
The equity method is a type of accounting used for intercorporate investments. It is used when the investor holds significant influence over the investee but does not exercise full control over it, as in the relationship between a parent company and its subsidiary. The investor will report its proportionate share of the investee’s equity as an investment (at cost).
The equity method acknowledges the substantive economic relationship between two entities. The investor records their share of the investee’s earnings as revenue from investment on their income statement. The equity method is generally used when a company holds significant influence over the company it is investing in.
