A subsidiary is any organization that belongs to a parent or holding company. Learn how to form a subsidiary and the benefits it offers.
The term subsidiary company refers to a separate entity that exists under the umbrella of another corporation, called a parent or holding company. Subsidiary companies typically operate on their own while still benefiting from the resources provided by their parent company.
Subsidiary companies have their own board of directors, which includes executive director representatives from the holding company. Read on to learn more about the benefits of a subsidiary company and how to form one.
What Is a Subsidiary Company?
A subsidiary company, or a separate legal entity that has been formed by a parent or holding company, could be related to its parent company or in a separate field.
Subsidiaries are often established as part of a business strategy that involves diversification. The parent company may create subsidiaries for different areas of interest, so it can invest in them without spreading itself too thinly across multiple industries.
A board of directors might consider starting a subsidiary company when they want to expand into new markets or industries, but don’t want to risk losing control over their core business. A subsidiary can provide its parent organization with valuable insight into how to operate in new markets and industries without taking on too much risk itself.
Benefits of a Subsidiary Company
A subsidiary is usually formed as a limited liability company (LLC). This means the business owners of the subsidiary have limited liability for any debts and obligations of the subsidiary.
Some benefits of creating a subsidiary company include:
- Ability to invest in multiple companies without setting up separate accounts for each investment.
- No limits on capital contributions from the parent company or the ability for employees to receive bonuses and benefits from the parent company.
- Increased flexibility in running your business operations and increased liability protection.
- Parent company expands its reach and profits while reducing risk.
- Better tax deductions.
Examples of Subsidiary Companies
A subsidiary company can be a corporation, LLC, or nonprofit. Examples of subsidiary companies include Instagram, which is owned by Facebook, and YouTube, which is owned by Google.
How to Form a Subsidiary Company
Follow these 3 steps to form a subsidiary company. Note, the subsidiary and parent company will be separate legal entities.
1. Complete Articles of Organization
When forming a subsidiary company, you must create and file Articles of Organization with your Secretary of State ‘s office. The Articles of Organization provide the legal foundation for your subsidiary company, and must include the subsidiary’s:
- Registered agent
- Governing law
2. Apply for City or County Permits
Depending on what type of work your subsidiary company does, it may need certain licenses or permits in order to operate legally within the jurisdiction where it’s based. Your subsidiary’s officers might be required to obtain an occupational license or contractor’s license from their local government office if they intend to sell products or services directly to consumers.
3. Submit Business Application
Lastly, you’ll need to fill out and submit the appropriate application forms to the state where you want to incorporate your business. For example, if you want to incorporate in North Carolina, you might submit forms NC-100 and NC-20 to the North Carolina Secretary of State’s office.
This will likely be referred to as an Articles of Incorporation form, which includes basic information such as the business name, what it intends to do, the address where the business will operate from, and information about the business owners.
Once your application has been approved, you’ll need to register the new business with the appropriate government agencies, such as the IRS.
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While creating a subsidiary company offers many benefits, it’s a complicated process that requires best-in-class governance tools and legal assistance. OnBoard is a growth-driven corporate governance solution that covers all the core operational items a company needs to manage at the board level. It’s flexible, scalable, and adaptable to grow with you, and helps companies become compliant with regulatory requirements.
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About The Author
- At OnBoard, we believe board meetings should be informed, effective, and uncomplicated. That’s why we give boards and leadership teams an elegant solution that simplifies governance. With customers in higher education, nonprofit, health care systems, government, and corporate enterprise business, OnBoard is the leading board management provider.
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