A subsidiary company is a legally independent enterprise, separated from the parent (main) business entity, established by it by transferring part of its property (capital). As a rule, it acts as a branch of the parent company that established it.
The charter of such an enterprise is approved by its founder, which retains certain managerial, control and other administrative functions in relation to it. The ability to control the activities of a subsidiary is guaranteed by the ownership of its shares and is built on the principle of a participation system.
A subsidiary company exists in difficult conditions for the parent company to participate in its capital. That is, she is in a dependent state from the head office.
Until 1994, the term "subsidiary" was understood to mean such an enterprise, the majority of its fixed assets (capital) belonged to another company. After the adoption of the amendments to the Civil Code of the Russian Federation (Article 105), the meaning of the term has changed. Now "subsidiaries" are understood as business companies created by other companies due to the predominance of their participation in the authorized capital or having the ability to control and approve decisions made by such enterprises. In other words, the emphasis is on the right of the parent company to determine the decisions made by the departments it has created.
The relations between parent and subsidiary enterprises are based on the principle of responsibility of the main company for the obligations of the enterprises established by it. They are jointly and severally liable for transactions concluded pursuant to the mandatory instructions of the parent company. In the event of the bankruptcy of a subsidiary company through the fault of the parent, the latter shall bear subsidiary liability for all obligations.
A subsidiary company is created by establishing a new organization or by separating it from the structure of the parent company.
Usually, the decision to create it is made when it is necessary to concentrate production in specialized areas in order to increase the competitiveness of the business entity, and the development of new markets. New business units are usually more mobile, flexible, and responsive to changes in the market for a particular product. The most urgent issue of creating units is for large manufacturing enterprises.
As was said, there are two ways in which a subsidiary can be created: reorganizing an existing company (including the form of spin-off) and setting up a new one. A more common way is to highlight it during the reorganization of legal entities. In this case, one or several companies can be created without terminating the activities of the company, which is undergoing reorganization. The choice of creation method depends on many factors.
Organizational aspects and existing timelines play a large role in this. The process of reorganization of a legal entity is quite complex and lengthy (takes up to six months). Establishment of a new society - a simpler and shorter duration of the event (can be completed in two weeks). In addition, when choosing a method of creating a subsidiary, factors such as the establishment of a decision-making body are taken into account; creditors notice; succession issues and others. In addition to organizational problems, there are tax risks associated with the payment of VAT and income tax.
The decision on the way in which the subsidiary will be created is associated with an analysis of the advantages and disadvantages of each of the above, taking into account the individual characteristics of the parent organization (composition of property, production volumes, etc.).