What is a Subsidiary?

A subsidiary is a company that is partially or wholly owned by another company, referred to as the parent company. In most cases, the parent company of a subsidiary will provide some type of operational, financial or managerial support to its subsidiary. The degree of control a parent company has over its subsidiary depends on the size and structure of the relationship between both businesses.

Subsidiaries vs. Affiliates

Subsidiaries are often confused with affiliates because both involve an indirect relationship with a larger parent company. However, there are key differences between these two types of businesses. Subsidiaries are wholly owned by the parent company, meaning that the parent company has a controlling stake in the business’s operations and financials, while affiliates are sometimes only partially owned by the parent company. Furthermore, subsidiaries are typically subject to more direct control by the parent company, while affiliates may operate more autonomously.

Advantages of Having a Subsidiary

Subsidiaries can offer organizations a variety of advantages. For parent companies, having a subsidiary allows for easier access to new markets. This is because the subsidiary can help manage the unique risks, regulations and labor taxes associated with a new area. Subsidiaries can also help increase the parent company’s production efficiency by taking on aspects of the operating process that are time-consuming. Lastly, subsidiaries can help parent companies raise capital by issuing majority-owned stocks using the parent company’s name, allowing for additional sources of funding.

In summary, a subsidiary is a form of business structure whereby a larger parent company partially or wholly owns a smaller subsidiary. This can help parent companies gain access to new markets, increase efficiency and raise capital. While in some ways a subsidiary is similar to an affiliate, there are major distinctions between the two, most notably that a parent company has a larger degree of control over its subsidiary than it would an affiliate.