A subsidiary company is a legal entity whose activities are influenced by another, the so-called parent company. Everything is simple: the “daughter” cannot independently make the majority of decisions and without the permission of the dominant company cannot dispose of its assets or perform other actions determined by the agreements between them. Accordingly, they also share responsibility for decisions made - the head office is always responsible for the subsidiary. However, there is a certain financial nuance: the subsidiary does not respond to the debts and obligations of the “parent” company.
Decisions on current activities are made by the executive bodies of the subsidiary, but the list of transactions with their maximum amounts that can be made only with the filing of the board of directors of the parent company should be specified in the charter documents.
Peculiarities of managing subsidiaries
Management of subsidiaries is not necessarily carried out only when the parent company owns a controlling stake. It is enough to define the relationship in several provisions entered in the charter of the subsidiary, or to specifically draw up a contract with the boundaries of influence. However, often a subsidiary is at the same time a dependent company, since the parent company holds more than 20% of the shares and authorized capital of the subsidiary.
Benefits of setting up a subsidiary
Parent and subsidiary in one bundle - this is an opportunity to solve several tasks facing the company at once, including:
- Firstly: a subsidiary is a successful development of foreign economic activity - for which a "daughter" is created in offshore zones for preferential taxation in transactions with foreign partners.
- Secondly: a subsidiary is an increase in the stability of the parent structure - all risky operations are transferred to the subsidiary, and the main department of the company is not prejudicial to those transactions that the dependent company has the right to conduct independently.
- Third: this is an improvement in the organization of current activities. The subsidiary may be assigned routine duties or special functions for the implementation of a separate project, or activities requiring regular licensing and accreditation.
- Fourth: a subsidiary is an increase in competitiveness due to the selection of core areas and specialization of the "daughter" in specific activities.
- And the last advantage: optimization of financial flows - the creation of additional profit centers with the help of subsidiaries, the receipt of an inflow of investments, the internal redistribution of income and costs.
Subsidiaries: related ties or dependence?
The management of a subsidiary is optimally suited to those holdings whose activities are diversified and which are
vertically integrated structures. This approach makes it possible to quickly respond to changing situations in different industries and regions. But to scale up mono-activity, creation of a branch network rather than opening subsidiaries is more suitable.