# Subsidiary Company: Definition, Examples, Pros, and Cons

> **Definition**
>
> A subsidiary company is a business that's owned by another company.

## What Is a Subsidiary Company?

In the corporate world, a subsidiary is a business entity that is owned in part or whole by a different company.

The company with the controlling share is known as the [parent company](https://www.investopedia.com/terms/p/parentcompany.asp) or the [holding company](https://www.investopedia.com/terms/h/holdingcompany.asp). The parent company owns or controls more than half of the subsidiary's stock.

In cases where a subsidiary is 100% owned by its parent company, the subsidiary is referred to as a [wholly-owned subsidiary](https://www.investopedia.com/terms/w/whollyownedsubsidiary.asp).

### Key Takeaways

*   Subsidiaries are separate and distinct from their parent companies and operate independently of them.
*   A company might buy or establish a subsidiary to obtain specific synergies or assets, secure tax advantages, and/or limit losses.
*   Shareholder approval is not required to turn a company into a subsidiary or to sell a subsidiary.
*   A subsidiary's financials are reported on the parent company's consolidated financial statements.

![Subsidiary](https://www.investopedia.com/thmb/4nt_mDnboIcG4HtDWb9ZiwC8co8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Subsidiary_Final_4188418-eaa203b00a2c4192bfd00863d51f8e85.jpg)

*— Investopedia / Paige McLaughlin*

## How a Subsidiary Company Works

Subsidiaries are separate and distinct legal entities from their parent companies, which is reflected in the independence of their liabilities, taxation, and governance.

However, given their controlling interest, parent companies often have [considerable influence over their subsidiaries](https://www.investopedia.com/terms/d/double_leverage.asp).

They—along with other subsidiary shareholders, if any—vote to elect a subsidiary company's board of directors, and there may often be a board-member overlap between a subsidiary and its parent company.

> **Important**
>
> To be designated a subsidiary, at least 50% of a company's equity has to be controlled by another entity. Anything less, and the company is considered an associate or affiliate company.

## Subsidiary Company Financials

A subsidiary usually prepares its own, independent [financial statements](https://www.investopedia.com/terms/f/financial-statements.asp). Typically, these are sent to the parent company, which will aggregate them—as it does financials from all of its operations—and carry them on its [consolidated financial statements](https://www.investopedia.com/terms/c/consolidatedfinancialstatement.asp).

In contrast, an associate company's financials are not combined with the parent company's. Instead, the parent company registers the value of its stake in the associate company as an asset on its [balance sheet](https://www.investopedia.com/terms/b/balancesheet.asp).

Accounting standards generally require that public companies consolidate in their records all majority-owned subsidiaries.

[Consolidation](https://www.investopedia.com/terms/c/consolidation.asp) is viewed as a more meaningful method of accounting than separate financials for a parent company and each of its subsidiaries.  

### Unconsolidated Subsidiary

An [unconsolidated subsidiary](https://www.investopedia.com/terms/u/unconsolidated-subsidiary.asp) is a subsidiary with financials that are not included in its parent company's statements.

Ownership of unconsolidated subsidiaries is typically treated as an equity investment and denoted as an asset on the parent company's balance sheet.

For regulatory reasons, unconsolidated subsidiaries are generally those in which a parent company does not have a significant stake.

> **Fast Fact**
>
> The U.S. Securities and Exchange Commission (SEC) states that only in rare cases, such as when a subsidiary is undergoing bankruptcy, should a majority-owned subsidiary not be consolidated.

## Subsidiary Company Advantages and Disadvantages

### Advantages

*   Buying an interest in a subsidiary usually requires a smaller investment by the parent company than a [merger](https://www.investopedia.com/terms/m/merger.asp) would. Also unlike a merger, shareholder approval is not required to purchase or sell a subsidiary.
*   A parent company buys or establishes a subsidiary to obtain specific [synergies](https://www.investopedia.com/terms/s/synergy.asp), such as a more diversified product line or assets in the form of earnings, equipment, or property.
*   Subsidiaries can be the experimental ground for different organizational structures, manufacturing techniques, and types of products.
*   In addition, subsidiaries can contain and limit problems for a parent company to some extent in the event of lawsuits, with the subsidiary serving as a kind of liability shield. Entertainment companies often set up individual movies or TV shows as separate subsidiaries for this reason.

### Disadvantages

*   Aggregating and consolidating a subsidiary's financials can make the parent company's accounting more complicated.
*   Since subsidiaries must remain independent to some degree, transactions with the parent company may have to be "[at arm's length](https://www.investopedia.com/terms/a/armslength.asp)," and the parent company might not have all of the control it wants.
*   Additionally, while a subsidiary can help shield the parent company from certain legal problems, the parent company may still be liable for criminal actions or corporate malfeasance by the subsidiary's management or other personnel.
*   Finally, the parent company may have to guarantee the subsidiary's loans, leaving it exposed to financial losses.

Pros

*   Contained/limited losses
    
*   Potential tax advantages
    
*   Easy to establish and sell
    
*   Synergy with other corporate divisions and subsidiaries
    

Cons

*   Extra legal and accounting work
    
*   Greater bureaucracy
    
*   More complex financial statements
    
*   Liability for subsidiary's actions, debts
    

## Examples of Subsidiary Companies 

Public companies are required by the SEC to disclose significant subsidiaries.

Warren Buffett's [Berkshire Hathaway Inc.](https://www.investopedia.com/terms/b/berkshire-hathaway.asp), for example, has a long and diverse list of subsidiary companies, including International Dairy Queen, Inc., Clayton Homes, Business Wire, GEICO, and Helzberg Diamonds.

![Image](https://www.investopedia.com/thmb/Qv0yU3LBtMsud_ierA8LQ-Y8CBg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/dotdash_Final_Subsidiary_Jul_2020-01-5cb00a7e65ed43618112f2f94829fc03.jpg)

**

Berkshire Hathaway's acquisition of many diverse businesses follows Buffett's oft-discussed strategy of buying [undervalued](https://www.investopedia.com/terms/u/undervalued.asp) assets and holding onto them.

In return, acquired subsidiaries often continue to operate independently while gaining access to broader financial resources. 

Like Berkshire Hathaway, [Alphabet Inc.](https://www.investopedia.com/articles/investing/020515/business-google.asp) has many subsidiaries, the best known of which is Google.

These separate business entities all perform unique operations intended to add value to Alphabet through diversification, revenue, earnings, and [research and development (R&D)](https://www.investopedia.com/terms/r/randd.asp).

## Is a Subsidiary Its Own Company?

Yes. A subsidiary is independent, operating as a separate and distinct entity from its parent company. Often, a parent company may issue [exchangable debt](https://www.investopedia.com/terms/e/exchangeabledebt.asp) that converts into shares of the subsidiary. That said, as the majority owner, the parent company influences how its subsidiary is run, and it may be liable for, e.g., the subsidiary's negligence or debt.

## Does a Subsidiary Have Its Own CEO?

A subsidiary usually has its own CEO and management team. However, the parent company will get a significant say in who runs the company and who sits on its board of directors.

## What Are Sister Companies?

Sister companies are two or more subsidiaries that are majority owned by the same parent company.

## The Bottom Line

A subsidiary is a company that is completely or partially owned by another company. Acquiring and establishing subsidiaries is fairly common among publicly-traded companies, especially in industries like tech and [real estate](https://www.investopedia.com/terms/r/realestate.asp).

The advantages of subsidiaries include tax benefits, increased efficiencies, and diversification. Drawbacks include limited control, greater bureaucracy and potential legal costs.

> **Article Sources**
>
> 1.  Financial Accounting Standards Board. "[Summary of Statement No. 94](https://www.fasb.org/page/PageContent?pageId=/reference-library/superseded-standards/summary-of-statement-no-94.html&bcpath=tff)."
>     
> 2.  U.S. Securities and Exchange Commission. "[Final Rule: Financial Statements and Periodic Reports for Related Issuers and Guarantors](https://www.sec.gov/rules/final/33-7878.htm)."
>     
> 3.  Berkshire Hathaway. "[Subsidiaries](https://www.berkshirehathaway.com/subs/sublinks.html)."