Subsidiary is a company that is controlled by another company through a parent child relationship. A company is only said to be a subsidiary company if the parent has controlling interest by owning over 50% of the issued share capital. A Subsidiary on its own may have subsidiaries. Subsidiaries are considered separate legal entities for taxation and regulation purpose.
Types of Subsidiaries – Three types of Subsidiaries can be formed namely:
-Public Limited Liability
-Minimum Capital – Must be paid by the founders (minimum two members)
-Shares – Can issue nominative or bearer shares
-Management – Should have at least three directors. One director should be a permanent resident of the country
-Private Limited Liability
-Minimum Capital – Must be paid by the founders
-Shares – Shares need to be nominative. Bearer shares cannot be subscribed
-Management – Managed by one or more managers
-Co-operative Company with limited liability
-Minimum Capital – Three partners are needed. One quarter of capital contribution must be paid-in
-Shares – Shares are nominative
-Management – A co-operative company with limited liability and managed by one or more managers
Parent Company – Subsidiary Relation
It is important that the subsidiary is recognized as an independent corporation managed by the board of directors even though it was incorporated by the parent company. This does not mean that the subsidiary is uncontrolled. The parent company has the legal authority to hold the subsidiary accountable to meet the financial objectives.
For the Parent company to control the independent subsidiary it should be:
-The sole shareholder
-Include voting control provisions in subsidiary article
-Prepare bylaws defining the authority of the officers, their term in the office and removal
-Prohibit bylaws amendment without shareholder’s approval
Legal Risks
As long as the parent company holds its subsidiary accountable for the expectations of its board of directors there is little risk for the parent to be found liable for the wrong doings of the subsidiary. But, if the parent company exercises excessive control for example has the same board of directors, use of common letterhead, in such case the parent company and the subsidiary are treated as one and the parent company is responsible for the subsidiaries debts etc.
Advantages and Disadvantages of Subsidiary
Advantages
-Considerable tax advantages and legal protections
-Ability to offset profits and losses of one part of a business with another
-Some countries allow subsidiaries to file tax returns on the profits obtained in that country
-Liabilities and credit claims are locked in that subsidiary and cannot be passed on to the parent company
-Allows for joint ventures with other companies with each owning a portion of the new business operation
Disadvantages
-Legal paperwork involved with creating a subsidiary can be lengthy and expensive
-Control also becomes an issue when a subsidiary is partially owned by another outside organization