What Is a Subsidiary Company? Definition, Benefits, and Drawbacks
- Published: 1 October 2025
- 11 min read
- Starting a Company
Rodney Wong
Author
Rodney supports customers in the UK in understanding the details and benefits of our products and services, helping them see how technology can transform their business. Passionate about the impact of the written word, he translates tech topics into clear, relevant, and practical insights, inspiring entrepreneurs to bring their ideas to life.
A subsidiary company is a distinct legal entity controlled by a parent company, usually through majority ownership. This article explains what is a subsidiary company, how it operates, and its pros and cons. We’ll also cover the different types, reasons for their creation, and provide real-world examples.
Key Takeaways
- A subsidiary company is a separate legal entity controlled by a parent company, which must own at least 51% of its shares.
- Subsidiaries allow for operational independence, financial autonomy, and risk isolation while still being strategically influenced by the parent company.
- Creating subsidiaries can provide benefits such as market diversification, liability limitation for the parent or holding company, and potential tax advantages.
Definition of a Subsidiary Company
A subsidiary company is an entity controlled by another company, referred to as the parent or holding company. A parent company must own at least 51% of a subsidiary’s shares to qualify it as such, allowing significant influence over operations and strategic decisions. Yet, a subsidiary remains a distinct legal entity from its parent or holding company. This means that while the parent company holds control, the subsidiary operates independently with its own organisational structure as an incorporated company.
The legal framework governing subsidiary companies is outlined in various regulations, such as the Companies Act of 2006 in the UK, along with supplementary provisions. These regulations ensure that subsidiaries maintain their own governance, financial records, and compliance standards, distinct from their parent companies. This dual-layered structure provides both flexibility and control, making subsidiaries a versatile tool in corporate strategy.
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How Subsidiary Companies Operate
Subsidiary companies operate in a unique space where they balance independence with the influence of their parent companies. This flexibility allows subsidiaries to expand into different locations, tailoring services to local consumer needs. Unlike divisions or branches that are key parts of the parent company, subsidiaries have their own legal standing and can engage in contracts, own assets, and manage their new subsidiary’s operations independently. In cases where multiple sister companies operate in different sectors, this independence enables more tailored market strategies.
Despite their operational independence, the parent company significantly influences a subsidiary’s strategic direction and governance. Effective communication ensures alignment in goals and strategies between the parent or holding company and its subsidiaries.
Financial management is another critical area, as subsidiaries often face challenges such as local taxation differences and currency fluctuations in the financial year, which can complicate decision-making.
Parent company's control over subsidiaries
A parent company exercises control over its subsidiaries primarily through owning more than half of the subsidiary’s common stock, enabling influence over key decisions, including appointing top management positions. Although subsidiaries can have their own CEO and management teams, these appointments are often influenced by the parent or holding company to ensure strategic alignment. The parent or holding company effectively controls its subsidiaries to maintain this alignment.
In cases of tiered subsidiaries, where a subsidiary owns another subsidiary, the parent or holding company’s influence can extend indirectly through these layers of ownership. Wholly-owned subsidiaries, where the parent company is the only shareholder, provide even greater control, allowing the parent company to make significant strategic and operational decisions without needing approval from other members and shareholders. By contrast, an associate company is one where the parent owns a significant stake but does not maintain full control.
Financial independence and obligations
Financial independence is a hallmark of subsidiary companies. Unlike divisions or branches, subsidiaries:
- Prepare their own financial statements, which are then aggregated with those of the parent company.
- Maintain their own tax responsibilities and regulatory compliance through independent financial management.
- Are responsible for their own liabilities, ensuring that any financial losses do not impact the parent or holding company’s financial standing.
This structure empowers the subsidiary to operate like its own company, making decisions aligned with local market conditions. This separation includes governance, with subsidiaries operating under their own rules and complying with local regulations, which can significantly differ from those of the parent company. This structure provides a layer of protection for the parent company, isolating potential risks and liabilities within the first tier subsidiary or second tier subsidiary. It also allows the board of directors of each entity to operate under different governance standards, providing flexibility across jurisdictions.
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Types of Subsidiary Companies
There are two primary categories of subsidiary companies. A wholly-owned subsidiary is entirely owned by the parent company. This means the parent holds 100% of the subsidiary’s shares. This complete ownership allows the parent company to have full control over the subsidiary’s strategic decisions. Wholly-owned subsidiaries are often used for strategic initiatives where the parent company needs absolute control.
Partially-owned subsidiaries are characterised by:
- The parent company owning more than 50% but less than 100% of the shares, which gives a majority of the voting rights and a controlling interest.
- Falling under the control of the parent company.
- The presence of other shareholders.
- Decisions potentially requiring broader consensus due to minority shareholders.
Both types of subsidiaries offer unique advantages and are chosen based on the specific strategic needs of the parent company.
Reasons for Creating Subsidiaries
There are several strategic reasons why companies create subsidiaries:
- To enter new markets and diversify offerings without risking the parent company’s core brand.
- To test new ideas.
- To diversify products.
- To expand into different markets.
This strategy allows for exploring new business opportunities while containing risks when creating a subsidiary. This separation ensures that challenges faced by one company do not affect the reputation or operations of the broader corporate group.
Subsidiaries also provide a platform for product diversification and independent branding. This flexibility enables companies to launch new products and services without affecting the parent company’s existing brand image. Moreover, establishing subsidiaries can attract new investors, signalling the parent company’s commitment to growth and expansion.
Limiting parent company liability
One of the key advantages of creating a subsidiary is the limitation of parent company liability. By operating as its own legal entity, a subsidiary can isolate risks and contain potential losses. This means that if a subsidiary incurs financial losses or faces legal challenges, the parent company’s assets and financial standing remain protected.
In cases where a subsidiary faces financial difficulties, the parent company’s limited liability is limited to its investment in the subsidiary. This structure ensures that the parent company’s own assets and financial health are not jeopardised by the subsidiary’s actions. Overall, this legal and financial independence is a significant strategic advantage for parent companies.
Tax benefits
Creating subsidiaries can provide significant tax benefits for parent companies. For instance, loan interests related to financing subsidiaries may be deductible for the parent company, offering a way to reduce taxable income. Subsidiaries can also offer capital gains tax exemptions, which can be advantageous for the parent company’s overall financial health.
Another key tax advantage is the deferral of corporation taxes on profits earned through subsidiaries. This deferment allows parent companies to strategically manage their tax liabilities and improve cash flow. Overall, the various tax advantages provided by two or more subsidiaries can contribute to the parent company’s financial stability and growth.
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Differences Between Subsidiaries and Other Business Structures
Differentiating between subsidiaries and other business structures is crucial for strategic planning. Unlike divisions or branches, subsidiaries are separate legal entities with their own governance and taxation rules, making them a distinct entity. In some cases, two companies may form a joint venture subsidiary where one holds the majority stake. Divisions, on the other hand, are internal segments of an existing company and do not have separate legal status. Similarly, branches operate as extensions of the parent company and lack independent legal standing.
Affiliate companies differ from subsidiaries in that the parent company owns less than 51% of their shares. This limited ownership means that the parent company has limited control over the affiliate’s operations.
Subsidiaries, however, allow for greater control and flexibility, enabling parent companies to launch different products and manage risks effectively. The distinct legal and operational corporate structure of subsidiaries makes them a versatile tool in corporate strategy.
Challenges in Managing Subsidiaries
Managing subsidiaries involves navigating legal complexities, particularly in determining asset ownership and ensuring regulatory compliance. Unconsolidated subsidiaries, for example, do not have their financial statements included in the parent company’s financial statements, adding to the complexity of financial management.
Managing subsidiaries effectively requires additional administrative and accounting processes. Implementing regular audits and designating compliance personnel can help mitigate these challenges, ensuring that subsidiaries operate within legal and regulatory frameworks. This becomes especially complex when managing multiple companies under one corporate group, each with different compliance needs.
Despite these hurdles, effective management practices can turn these challenges into opportunities for growth and expansion.
Examples of Well-Known Subsidiary Companies
To illustrate the concept of subsidiary companies, consider some well-known examples. Yum! Brands, originally part of PepsiCo, includes popular fast-food chains like Taco Bell, KFC, and Pizza Hut. Nestlé is another example, owning a wide array of brands including Purina, Nespresso, and Gerber. These subsidiaries operate independently while benefiting from the resources and strategic direction of their parent companies.
Other notable examples include:
- The Coca-Cola Company, which owns brands like Fanta, Sprite, and Dasani
- Procter & Gamble, managing household brands such as Tide, Pantene, and Crest
- Mars, Incorporated, known for its confectionery brands like M&M’s and Snickers
These companies exemplify the strategic use of sister companies and subsidiary companies.
How to Set Up a Subsidiary Company
Setting up a subsidiary involves deciding whether to acquire an existing company or establish a new company. If acquiring this other company, the parent company must conduct a controlling share purchase of a majority of the shares. In some cases, the terms of the acquisition are governed by a shareholder agreement that outlines rights, responsibilities, and exit strategies. If creating a new incorporated company, the process includes choosing a company name, selecting a registration package, providing a registered office address, and completing the online registration. As part of the process, the company must also draft and file its articles of association, which define its governance structure. In the UK, Companies House processes the registration within 24 hours.
After being established, the parent company must appoint at least one individual as a director for the subsidiary. This ensures proper management and oversight by the board of directors. Adhering to local regulations is crucial, especially when entering new markets. The formation of a subsidiary not only facilitates regulatory compliance but also offers strategic advantages for the board of directors in terms of risk management and market expansion.
From company formation to ongoing accounting and compliance, Osome offers end-to-end support tailored to parent companies expanding into the UK. We make sure your subsidiary is not only registered correctly but also stays compliant from day one. Contact us to get started.
Tools for Effective Subsidiary Management
Managing subsidiary companies effectively requires the right tools and strategies. Entity management software can be invaluable in tracking governance decisions, regulatory compliance, and financial records. Utilising cloud-based systems can streamline these efforts, enhancing operational efficiency and compliance for the management team.
Centralising subsidiary data improves information accuracy and accessibility, supporting informed decision-making. Additionally, subsidiaries can benefit from shared access to resources, which can enhance both financial and marketing strategies. By leveraging these tools, parent companies can manage their subsidiaries more effectively, turning potential challenges into opportunities for growth.
Summary
Understanding subsidiary companies is crucial for anyone involved in corporate strategy. These entities offer numerous benefits, including risk management, tax advantages, and market diversification. However, managing subsidiaries also comes with challenges that require careful planning and the right tools. By leveraging the strategic advantages of subsidiaries, companies can achieve growth and stability in an increasingly complex business landscape.
Rodney supports customers in the UK in understanding the details and benefits of our products and services, helping them see how technology can transform their business. Passionate about the impact of the written word, he translates tech topics into clear, relevant, and practical insights, inspiring entrepreneurs to bring their ideas to life.
