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Subsidiaries :
A subsidiary, in business, is an entity which is controlled by another entity. The controlled
entity is called a company, Corporation, or Limited Liability Company, and the controlling entity is called its parent (or the parent company).
The reason for this distinction is that an individual cannot be a subsidiary of any organization, only an entity representing a legal fiction as a separate entity can be a subsidiary. This is because individuals have the capacity to act on their own initiative; a business entity can only act through its directors, officers and employees.
The most common way that control of a subsidiary is achieved is through the ownership of shares in the subsidiary by the parent. These shares give the parent the necessary votes to determine the composition of the board of the subsidiary and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary.
There are, however, other ways that control can come about and the exact rules both as to what control is needed and how it is achieved can be complex
A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their
own.
A parent and all its subsidiaries together are called a group, although this term can also apply to
cooperating companies and their subsidiaries with varying degrees of shared ownership. When
ownership is not shared, so that a subsidiary is wholly owned, it is called a branch. A subsidiary is different from a branch in that the former is jointly owned by the parent company and others while the latter is completely owned by the parent company.[citation needed]
Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For this reason, they differ from divisions, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it.
Subsidiaries are a common feature of business life and few if any major businesses do not organize their operations in this way.
Examples include holding companies such as Berkshire Hathaway, Time
Warner, or Citigroup as well as more focused companies such as IBM, or Xerox Corporation. These, and others, organize their businesses into national or functional subsidiaries, sometimes with multiple levels of subsidiaries.
An operating subsidiary is a business term frequently used within the United States railroad industry.
In the case of a railroad, it refers to a company that is a subsidiary but operates with its own identity, locomotives and rolling stock.
In contrast, a non-operating subsidiary would exist on paper only (i.e. stocks, bonds, articles of
incorporation) and would use the identity and rolling stock of the parent company.
Reasons why a company may have subsidiaries.
The following are common reasons why companies have subsidiaries, but no list can ever be exhaustive.
-Risk: Many businesses use subsidiaries to manage risk. This is achieved usually by setting up a
subsidiary corporation to undertake the higher risk venture. If that venture subsequently become subject to litigation or liability, legally the subsidiary corporation would be liable and not the parent (unless the parent made guarantees, in which case the parent is liable for the guarantees it made).
- Acquisition: When one company acquires another, the one acquired becomes a subsidiary of the acquiring company.
-Regulation: Law may require a company to conduct certain activities through a distinct entity.
Examples include banking or the operation of utilities such as electricity or telecommunications. As subsidiaries are distinct legal entities, this ensures full disclosure of the financial results of these businesses and insulates them from the other activities of their group.
- Territoriality: A group, particularly a multinational one, may create subsidiaries in many jurisdictions simply to prevent someone else doing so to the confusion of their customers.
-Taxation: Taxation is still largely conducted on national lines. Multinational businesses may therefore establish subsidiaries in each jurisdiction to bring together all their activities in that jurisdiction.
