Relationship between parent company and subsidiary

The Relationship Between a Company & Its Subsidiary |

relationship between parent company and subsidiary

A parent company by definition owns one or more separate corporations, known as subsidiaries. The parent company may own the subsidiary. Parent companies can be either hands-on or hands-off owners of its subsidiaries, depending on the amount of managerial control given to. Relationships Between Parent and Subsidiary Parent purchases assets of corporation → forms new subsidiary made up of assets.

relationship between parent company and subsidiary

Details[ edit ] Subsidiaries are separate, distinct legal entities for the purposes of taxationregulation and liability.

For this reason, they differ from divisionswhich are businesses fully integrated within the main company, and not legally or otherwise distinct from it. However, creditors of an insolvent subsidiary may be able to obtain a judgment against the parent if they can pierce the corporate veil and prove that the parent and subsidiary are mere alter egos of one another, therefore any copyrights, trademarks, and patents remain with the subsidiary until the parent shuts down the subsidiary.

  • The Relationship Between a Company & Its Subsidiary

One of the ways of controlling 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.

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.

relationship between parent company and subsidiary

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 groupalthough 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 DanJaqa closely held family company, which controls Eon Productionsthe large corporation which manages the James Bond franchise.

Conversely, the parent may be larger than some or all of its subsidiaries if it has more than oneas 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.

Subsidiary - Wikipedia

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 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[ edit ] In descriptions of larger corporate structures, the terms "first-tier subsidiary", "second-tier subsidiary", "third-tier subsidiary" etc.

Company Law Lectures for CA,CS,CMA // Holding and Subsidiary Company

The ownership structure of the small British specialist company Ford Component Sales, which sells Ford components to specialist car manufacturers and OEM manufacturers, such as Morgan Motor Company and Caterham Cars[12] illustrates how multiple levels of subsidiaries are used in large corporations: The directors must make decisions based on the best interests of the subsidiary, not the parent.

The directors are subject to the same corporate laws and regulations as any board of directors. Subsidiary directors don't report to the parent board, except in the same way they'd report to a stockholder.

What Is a Parent Company Subsidiary Relationship?

However, the parent company has the authority to replace the directors if it doesn't like their management decisions. Legally this is a better option than overruling or dictating to them. Parental Power There are ways for the parent company to keep tight control without violating the subsidiary's independence.

The power to hire and fire the board is a crucial one, but it can be made stronger.


With a new subsidiary, for example, the parent, as owner, can draft the articles of incorporation, including certain provisions to solidify control: The parent company can place its own directors on the subsidiary board but this has drawbacks.

It's harder to make good decisions when serving two masters. If the subsidiary gets sued, shared directors might be used to prove the subsidiary isn't really independent. Liability One reason corporations set up subsidiaries is to protect themselves legally. If the subsidiary stays independent, the parent isn't liable for any negligent or criminal acts on the subsidiary's part.

However, the law does allow for exceptions: There's no real independence.