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A subsidiary, subsidiary company or daughter company is a
company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture of both, with a specific objective. Company members share a common ...
owned or controlled by another company, which is called the
parent company A parent company is a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture of both, with a specific objective. ...
or
holding company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produce goods or services itself. Its purpose is to own shares of other companies t ...
. Two subsidiaries that belong to the same parent company are called sister companies. The subsidiary can be a company,
corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal ...

corporation
or
limited liability company A limited liability company (LLC) is the US-specific form of a private limited company A private limited company is any type of business entity in Privately held company, "private" ownership used in many jurisdictions, in contrast to a Publ ...
, and in some cases a government- or
state-owned enterprise A state-owned enterprise (SOE) or government-owned enterprise (GOE) is a business enterprise where the government or state has significant control through full, majority, or significant minority ownership. Defining characteristics of SOEs are ...
. They are a common feature of modern business life and most
multinational corporation A multinational company (MNC) is a corporation, corporate organization that owns and controls the production of goods or services in at least one country other than its home country. Control is considered an important aspect of an MNC, to distingui ...
s organize their operations in this way. Examples include holding companies such as
Berkshire Hathaway Berkshire Hathaway () is an American multinational Multinational may refer to: * Multinational corporation, a corporate organization operating in multiple countries * Multinational force, a military body from multiple countries * Multinational ...

Berkshire Hathaway
,
Jefferies Financial Group Jefferies Financial Group Inc. is an American financial services Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including cred ...
,
The Walt Disney Company The Walt Disney Company, commonly just Disney (), is an American multinational entertainment Entertainment is a form of activity that holds the attention and Interest (emotion), interest of an audience or gives pleasure and delight. It ...
,
WarnerMedia Warner Media, LLC (Trade name, traded as WarnerMedia, but stylized as WarnerMedia; formerly known as Time Warner from 1990 to 2001 and again from 2003 to 2018; from 2001 to 2003, AOL Time Warner and from 1972 to 1990, Warner Communications) is ...

WarnerMedia
, or
Citigroup Citigroup Inc. or Citi (Style (visual arts), stylized as citi) is an American multinational investment banking, investment bank and financial services corporation headquartered in New York City. The company was formed by the merger of banking g ...

Citigroup
; as well as more focused companies such as
IBM International Business Machines Corporation (IBM) is an American multinational technology company headquartered in Armonk, New York, with operations in over 170 countries. The company began in 1911, founded in Endicott, New York, as the C ...

IBM
,
Xerox Xerox Holdings Corporation (; also known simply as Xerox) is an American corporation that sells print and digital document An electronic document is any electronic media content (other than computer program A computer program is a collection ...
, or
Microsoft Microsoft Corporation is an American multinational corporation, multinational technology company with headquarters in Redmond, Washington. It develops, manufactures, licenses, supports, and sells Software, computer software, consumer electroni ...

Microsoft
. These, and others, organize their businesses into national and functional subsidiaries, often with multiple levels of subsidiaries.


Details

Subsidiaries are separate, distinct
legal Law is a system of rules created and law enforcement, enforced through social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has be ...
entities for the purposes of
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law, a legal person is any person A person (plural people or persons) is a being that has certain capacities or attr ...
ation,
regulation Regulation is the management of complex systems according to a set of rules and trends. In systems theory, these types of rules exist in various fields of biology and society, but the term has slightly different meanings according to context. Fo ...

regulation
and
liability Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, retai ...
. For this reason, they differ from
divisions Division or divider may refer to: Mathematics *Division (mathematics) Division is one of the four basic operations of arithmetic, the ways that numbers are combined to make new numbers. The other operations are addition, subtraction, and multi ...
, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it. In other words, a subsidiary can sue and be sued separately from its parent and its obligations will not normally be the obligations of its parent. However, creditors of an insolvent subsidiary may be able to obtain a judgment against the parent if they can
pierce the corporate veil Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders. Usually a corporation is treated as a Corporate personhood, separate legal ...
and prove that the parent and subsidiary are mere
alter egos An alter ego (Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally spoken in the area around Rome, known as Latium. Through the power of the Roman R ...
of one another, therefore any copyrights, trademarks, and patents remain with the subsidiary until the parent shuts down the subsidiary. One of the ways of controlling a subsidiary is achieved through the ownership of
shares In financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known ...
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 (see below). 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
corporate A corporation is an organization—usually a group of people or a company A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal ...
, although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership. A parent company does not have to be the larger or "more powerful" entity; it is possible for the parent company to be smaller than a subsidiary, such as
DanJaq Danjaq, LLC (formerly Danjaq S.A. and Danjaq, Inc.) is the holding company A holding company is a company whose primary business is holding a controlling interest in the securities of other companies. A holding company usually does not produc ...
, a closely held family company, which controls
Eon Productions Eon Productions Ltd. is a British film production Filmmaking (film production) is the process by which a Film, motion picture is #Production, produced. Filmmaking involves a number of complex and discrete stages, starting with an initial st ...
, the large corporation which manages the
James Bond The ''James Bond'' series focuses on a fictional British Secret Service The Secret Intelligence Service (SIS), commonly known as MI6, is the foreign intelligence service of the United Kingdom The United Kingdom of Great Britain a ...
franchise. Conversely, the parent may be larger than some or all of its subsidiaries (if it has more than one), as the relationship is defined by control of ownership shares, not the number of employees. The parent and the subsidiary do not necessarily have to operate in the same locations or operate the same businesses. Not only is it possible that they could conceivably be competitors in the marketplace, but such arrangements happen frequently at the end of a
hostile takeover In business, a takeover is the purchase of one company (law), company (the ''target'') by another (the ''acquirer'', or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in ...
or voluntary merger. Also, because a parent company and a subsidiary are separate entities, it is entirely possible for one of them to be involved in legal proceedings, bankruptcy, tax delinquency, indictment or under investigation while the other is not.


Tiered subsidiaries

In descriptions of larger corporate structures, the terms "first-tier subsidiary", "second-tier subsidiary", "third-tier subsidiary", etc., are often used to describe multiple levels of subsidiaries. A first-tier subsidiary means a subsidiary/daughter company of the ultimate parent company,Houston Chronicle Small Business sector: ''What Is a First Tier Subsidiary?''
Retrieved 2013-04-12
while a second-tier subsidiary is a subsidiary of a first-tier subsidiary: a "granddaughter" of the main parent company. Consequently, a third-tier subsidiary is a subsidiary of a second-tier subsidiary—a "great-granddaughter" of the main parent company. The ownership structure of the small British specialist company Ford Component Sales, which sells Ford components to specialist car manufacturers and
OEM An original equipment manufacturer (OEM) is generally perceived as a company that produces parts and equipment that may be marketed by another manufacturer. However, the term is also used in several other ways, which causes ambiguity Ambig ...

OEM
manufacturers, such as
Morgan Motor Company The Morgan Motor Company is a family-owned English automobile, motor car manufacturer founded in 1910 by H.F.S. Morgan, Henry Frederick Stanley Morgan. Morgan is based in Malvern Link, an area of Malvern, Worcestershire, Malvern, Worcestershir ...
and
Caterham Cars Caterham Cars is a British manufacturer of specialist lightweight sports cars established in Caterham Caterham () is a town in the Tandridge District of Surrey Surrey () is a county in South East England which borders Kent to the east, ...
, illustrates how multiple levels of subsidiaries are used in large corporations: *
Ford Motor Company The Ford Motor Company, commonly known as Ford, is an American multinational automaker that has its main headquarters in Dearborn, Michigan, a suburb of Detroit (strait) , nicknames = The Motor City, Motown, Rena ...
– U.S. parent company based in Dearborn,
Michigan Michigan () is a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Department of State * The State (newspaper), ''The State'' (newspaper), a daily newspaper ...

Michigan
** Ford International Capital LLC – First-tier subsidiary (U.S. holding company located in Dearborn, Michigan, but registered in
Delaware Delaware ( ) is a U.S. state, state in the Mid-Atlantic (United States), Mid-Atlantic region of the United States, bordering Maryland to its south and west; Pennsylvania to its north; and New Jersey and the Atlantic Ocean to its east. The sta ...
)SEC: ''Subsidiaries of Ford Motor Company as of February 11, 2011''
Retrieved 2013-04-12
*** Ford Technologies Limited – Second-tier subsidiary (British holding company, located at the Ford UK head office in Brentwood,
Essex Essex () is a Ceremonial counties of England, county in the East of England. One of the home counties, it borders Suffolk and Cambridgeshire to the north, the North Sea to the east, Hertfordshire to the west, Kent across the estuary of the Rive ...

Essex
, with five employees) **** Ford Motor Company Limited – Third-tier subsidiary (the main British Ford company, with head office in Brentwood, with 10,500 employees)


Control


General

The word "control" and its derivatives (subsidiary and parent) may have different meanings in different contexts. These concepts may have different meanings in various areas of law (e.g.
corporate law Corporate law (also known as business law or enterprise law or sometimes company law) is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal pract ...
,
competition law Competition law is a law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is ...
,
capital markets law Securities regulation in the United States is the field of Law of the United States, U.S. law that covers transactions and other dealings with Security (finance), securities. The term is usually understood to include both federal and state-level reg ...
) or in
accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or event, which can be used to compare with other obj ...
. For example, if Company A purchases shares in Company B, it is possible that the transaction is not subject to merger control (because Company A had been deemed to already control Company B before the share purchase, under competition law rules), but at the same time Company A may be required to start consolidating Company B into its financial statements under the relevant accounting rules (because it had been treated as a
joint venture A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to access ...
before the purchase for accounting purposes). Control can be direct (e.g., an ultimate parent company controls the first-tier subsidiary directly) or indirect (e.g., an ultimate parent company controls second and lower tiers of subsidiaries indirectly, through first-tier subsidiaries).


European Union

Recital 31 of Directive 2013/34/EU stipulates that control should be based on holding a majority of voting rights, but control may also exist where there are agreements with fellow shareholders or members. In certain circumstances, control may be effectively exercised where the parent holds a minority or none of the shares in the subsidiary. According to Article 22 of the directive 2013/34/EU an undertaking is a parent if it: * has a majority of the shareholders' or members' voting rights in another undertaking (a subsidiary undertaking); * has the right to appoint or remove a majority of the members of the administrative, management or supervisory body of another undertaking (a subsidiary undertaking) and is at the same time a shareholder in or member of that undertaking; * has the right to exercise a dominant influence over an undertaking (a subsidiary undertaking) of which it is a shareholder or member, pursuant to a contract entered into with that undertaking or to a provision in its memorandum or articles of association, where the law governing that subsidiary undertaking permits its being subject to such contracts or provisions. * is a shareholder in or member of an undertaking, and: ** a majority of the members of the administrative, management or supervisory bodies of that undertaking (a subsidiary undertaking) who have held office during the financial year, during the preceding financial year and up to the time when the consolidated financial statements are drawn up, have been appointed solely as a result of the exercise of its voting rights; or ** controls alone, pursuant to an agreement with other shareholders in or members of that undertaking (a subsidiary undertaking), a majority of shareholders' or members' voting rights in that undertaking. Additionally, control may arise when: * a parent undertaking has the power to exercise, or actually exercises, dominant influence or control over another undertaking (the subsidiary undertaking); or * a parent undertaking and another undertaking (the subsidiary undertaking) are managed on a unified basis by the parent undertaking. Under the international accounting standards adopted by the EU a company is deemed to control another company only if it has all the following: * power over the other company; * exposure, or rights, to variable returns from its involvement with the other company; and * the ability to use its power over the other company to affect the number of the company's returns (
IFRS International Financial Reporting Standards, commonly called IFRS, are accounting standard Publicly traded companies typically are subject to the most rigorous standards. Small and midsized businesses often follow more simplified standards, plus a ...
10 para 7). Power generally arises when the parent has rights that give it the ability to direct the relevant activities, i.e. the activities that significantly affect the other subsidiary's returns. A subsidiary can have only one parent; otherwise, the subsidiary is, in fact, a joint arrangement (joint operation or joint venture) over which two or more parties have joint control (IFRS 11 para 4). Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.


United Kingdom

The
Companies Act 2006 The Companies Act 2006 (c 46) is an Act of the Parliament of the United Kingdom The Parliament of the United Kingdom is the Parliamentary sovereignty in the United Kingdom, supreme Legislature, legislative body of the United Kingdom, the ...
contains two definitions: one of "subsidiary" and the other "subsidiary undertaking". According to s.1159 of the Act, a company is a "subsidiary" of another company, its "holding company", if that other company: * holds a majority of the voting rights in it, or * is a member of it and has the right to appoint or remove a majority of its board of directors, or * is a member of it and controls alone, pursuant to an agreement with other members, a majority of the voting rights in it, or if it is a subsidiary of a company that is itself a subsidiary of that other company. The second definition is broader. According to s.1162 of the Companies Act 2006, an undertaking is a parent undertaking in relation to another undertaking, a subsidiary undertaking, if: * it holds a majority of the voting rights in the undertaking, or * it is a member of the undertaking and has the right to appoint or remove a majority of its board of directors, or * it has the right to exercise a dominant influence over the undertaking— ** by virtue of provisions contained in the undertaking's articles, or ** by virtue of a control contract, or * it is a member of the undertaking and controls alone, pursuant to an agreement with other shareholders or members, a majority of the voting rights in the undertaking. An undertaking is also a parent undertaking in relation to another undertaking, a subsidiary undertaking, if: * it has the power to exercise, or actually exercises, dominant influence or control over it, or * it and the subsidiary undertaking are managed on a unified basis. The broader definition of "subsidiary undertaking" is applied to the accounting provisions of the Companies Act 2006, while the definition of "subsidiary" is used for general purposes.


Oceania

In
Oceania Oceania (, , ) is a Region, geographic region that includes Australasia, Melanesia, Micronesia and Polynesia. Spanning the eastern hemisphere, Eastern and Western Hemispheres, Oceania has a land area of and a population of over 41 million. Wh ...

Oceania
, the accounting standards defined the circumstances in which one entity controls another. In doing so, they largely abandoned the legal control concepts in favour of a definition that provides that "control" is "the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity". This definition was adapted in the
Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Australia (continent), Australian continent, the island of Tasmania, and numerous List of islands of Australia, smal ...

Australia
n
Corporations Act 2001 The Corporations Act 2001 (Cth) (the Corporations Act, or CA 2001) is an Act of the Commonwealth of Australia Australia, officially the Commonwealth of Australia, is a Sovereign state, sovereign country comprising the mainland of the Aust ...
: s 50AA. And also it can be a very useful part of the company that allows every head of the company to apply new projects and latest rules.


Business models which feature elements similar to subsidiaries

*
Chaebol A ''chaebol'' (, ; ) is a large industrial conglomerate that is run and controlled by a person or family in South Korea. A chaebol often consists of many diversified affiliates, controlled by a person or group of persons whose power over the g ...
*
Conglomerate Conglomerate or conglomeration may refer to: * Conglomerate (company) * Conglomerate (geology) * Conglomerate (mathematics) In popular culture: * The Conglomerate (American group), a production crew and musical group founded by Busta Rhymes ** Con ...
*
Keiretsu A is a set of companies A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal personality, legal or a mixture of both, with a specific objective. Comp ...

Keiretsu
*
Zaibatsu is a Japanese Japanese may refer to: * Something from or related to Japan , image_flag = Flag of Japan.svg , alt_flag = Centered deep red circle on a white rectangle , image_coat ...


See also

*
Associate company An associate company (or associate) in accounting Accounting or Accountancy is the measurement ' Measurement is the number, numerical quantification (science), quantification of the variable and attribute (research), attributes of an object or ...
*
Consolidation (business) In business Business is the activity of making one's living or making money by producing or buying and selling products (such as goods and services). Simply put, it is "any activity or enterprise entered into for profit." Having a busines ...
*
Control premium A control premium is an amount that a buyer is sometimes willing to pay over the current market price of a publicly traded company in order to acquire a controlling share in that company. If the market perceives that a public company's profit and c ...
*
Controlling interest A controlling interest is an ownership interest in a corporation with enough voting stock In finance, stock (also capital stock) consists of all of the shares In financial markets A financial market is a market in which people trade ...
*
Cooperative federationA co-operative federation or secondary co-operative is a co-operative A cooperative (also known as co-operative, co-op, or coop) is "an autonomy, autonomous association of persons united voluntarily to meet their common economic, social, and cu ...
*
Division (business) A division of a business, sometimes called a business sector or business unit (segment), is one of the parts into which a business, organization or company is divided. The divisions are distinct parts of that business. If these divisions are all par ...
*
Joint venture A joint venture (JV) is a business entity created by two or more parties, generally characterized by shared ownership, shared returns and risks, and shared governance. Companies typically pursue joint ventures for one of four reasons: to access ...
*
Enterprise valueEnterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value Market may refer to: *Market (economics) A market is a composition of system A system is a group of Interaction, intera ...
*
Equity method Equity method in accounting is the process of treating investments in associate companies. Equity accounting is usually applied where an investor entity holds 20–50% of the voting stock of the associate company, and therefore has significant infl ...
* Good standing *
Goodwill (accounting) In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been calle ...
*
Mergers and acquisitions In corporate finance Corporate finance is the area of finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money a ...
*
Minority interest In accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic entities such as businesses and corporations. Accounting, which has been called ...
* Peren-Clement-Index *


Notes


References

{{Authority control
Legal entitiesThis category contains articles related to juristic or natural person In jurisprudence Jurisprudence, or legal theory, is the theoretical study of law. Scholars of jurisprudence seek to explain the nature of law in its most general form and ...
Business terms Business models Types of business entity