Subsidiary

Definition

A subsidiary is a company that is completely or partially owned by another company, known as the parent company. This structure allows the parent company to manage and control its various business units while enabling subsidiaries to operate with a degree of independence. Subsidiaries play a vital role in a corporation's overall strategy, helping to expand market reach, diversify products, and mitigate risks.

5 Must Know Facts For Your Next Test

1. Subsidiaries can be wholly owned, where the parent company owns 100% of the shares, or partially owned with shared ownership.
2. The formation of subsidiaries allows a parent company to operate in different geographical regions or market segments without exposing itself to all the risks associated with direct ownership.
3. Each subsidiary often has its own management team that operates independently while still adhering to the overall strategic goals set by the parent company.
4. The financial performance of subsidiaries is often consolidated into the parent company's financial statements, impacting the overall corporate results.
5. Regulatory frameworks may dictate how subsidiaries operate, especially in different countries, which can influence corporate governance and compliance.

Review Questions

• How do subsidiaries contribute to the strategic objectives of a parent company?
  • Subsidiaries help parent companies achieve strategic objectives by allowing them to enter new markets, diversify product offerings, and spread risk across different business units. By operating as separate entities, subsidiaries can respond more quickly to local market conditions while still aligning with the overarching goals of the parent company. This structure enables greater flexibility in management and operational decisions.
• Discuss the implications of having multiple subsidiaries under a single parent company in terms of financial reporting and management oversight.
  • Having multiple subsidiaries under one parent company creates complexities in financial reporting and management oversight. The financial results of all subsidiaries are typically consolidated into the parent company's financial statements, which requires careful accounting practices to ensure accuracy. Management must also oversee diverse operations across different industries or regions, requiring effective communication and strategic alignment to ensure that each subsidiary contributes positively to the overall goals of the corporation.
• Evaluate the potential advantages and disadvantages of using subsidiaries as a business strategy for a large corporation.
  • Using subsidiaries as a business strategy offers several advantages for large corporations, such as enhanced market penetration, risk diversification, and the ability to leverage local expertise. However, there are also disadvantages, including increased complexity in management and reporting, potential cultural clashes between subsidiaries and the parent company, and possible regulatory challenges in different jurisdictions. Evaluating these factors is essential for corporations to effectively utilize subsidiaries while mitigating potential downsides.

Related terms

Parent Company: A corporation that owns a controlling interest in one or more other companies, which are referred to as subsidiaries.

Merger: A combination of two or more companies to form a new entity, often to achieve greater efficiency, market share, or financial strength.

Joint Venture: A business arrangement where two or more parties agree to pool their resources for a specific goal, often creating a new subsidiary that is jointly owned by the parties.