In today’s economy, businesses are constantly looking for ways to expand their reach, manage risks, and explore new opportunities. One effective strategy for achieving these goals is through the creation of subsidiary companies.
But what exactly is a subsidiary, and why do companies choose this structure? In this blog, we are going to break down the concept of a subsidiary company, and its functions and highlight the benefits and challenges that come with it. Let us get started with what does a subsidiary company mean:
What is a Subsidiary Company?
A subsidiary is referred to an independent entity, owned 100% by a parent company that has a controlling interest in owning a certain percentage of stocks.
A subsidiary operates independently, with its own leadership and business strategy. Subsidiaries allow companies to expand into new markets, reduce operational risks, and diversify their revenue pathways.
How do Subsidiary Companies Work?
Subsidiaries are 100% owned by another company, i.e., either by a parent or holding company. A subsidiary has a separate and distinct brand name, legal entity, business strategy, subsidiary’s board of directors, finances, and even responsibility for its profit or loss.
Generally, the parent company may control 50% of its shares. Moreover, if the parent companies control 100% of their shares in a subordinate company then subsidiaries are called wholly owned subsidiaries. In return, the associate company generates profit for the parent company.
Pros and Cons of Subsidiary
Did you know? Creating subsidiaries is a strategic move by the parent company to earn more and manage the risks effectively. After understanding how subsidiaries operate, the following are some major pros and cons that will help you know more.
Pros of Subsidiary
Tax Advantages
Subsidiaries provide taxation benefits. Expenses related to business activities can reduce the holding company’s taxable income through tax consolidation, price, and profit sharing.
Additionally, these subsidiary operations can enhance overall profitability if they are conducted in an area with lower income rates rather than the parent company’s location. Moreover, setting up a subsidiary in regions with lower tax rates can lead to higher profits for the holding company.
Limited Liability
If the subsidiary confronts financial trouble or incurs a loss, it is generally limited to the subsidiary itself. The partially owned company’s other businesses or assets are shielded from these losses.
The parent company is not responsible for all the losses that the subsidiary faces, Hence reducing risk. In the event of a crash or legal action, the larger company only suffers those investment losses in the subsidiary, not its entire business.
Establishing Subsidiaries
Setting up a subsidiary is generally more straightforward than setting up a new independent company with the holder’s support. The major purpose of creating a subsidiary is to explore new business operations, new products and services without changing the business structure.
Subsidiary is a fresh entity to attract the targeted audience. Moreover, if one subsidiary is not doing well and is no longer aligned with the long-term goals, the parent company can easily shut it down. This structure allows companies to explore new markets.
Expand into New Markets
When subsidiaries work together under the same owned company, they bring better outcomes. For instance, if a parent company owns a tech and healthcare division, then the healthcare subsidiary uses the tech division’s software to advance medical technology.
Hence, by sharing knowledge, we can benefit each other. Resultantly, this brings innovation with collaboration.
Cons of Subsidiary
Extra Legal Work
Starting a subsidiary might seem like a dream, but it requires effort in terms of legal and financial requirements which is time-consuming. So, in this case, you must contact the experts in host countries to learn about their rules and regulations. This can be time-consuming and complex.
Increased Layers of Management
If various subsidiaries’ operations are running under the same parent company, then the decision-making process can slow down due to layers of management and more procedures to follow. This can lead to inefficiency.
Complex Financial Statements
When multiple subsidiaries operate, the consolidated financial statement also increase, making the parent company’s financial statement more difficult. Additionally, it is complex to understand overall finance, increasing the chances of errors.
Parent and Subsidiary Company Examples
- Alphabet Inc. is the parent company of several eyewitnessed subsidiaries like Google, YouTube, Waymo (the autonomous vehicles run by AI) Verily, calico
- The Walt Disney Company owns various subsidiaries in the entertainment and media industry such as Marvel Studios, Lucasfilm, ESPN, and ABC.
- Meta Platforms, Inc. (formerly Facebook) owns Facebook, Instagram, WhatsApp Oculus VR
- Warren Buffett, a famous investor, runs GEICO, Dairy Queen, Duracell, BNSF Railway, and Fruit of the Loom under the ownership of his parent company, Berkshire Hathaway.
How can you Set up a Subsidiary in the UAE?
- Choose the jurisdiction between Mainland, Free Zone, or Offshore.
- Select the type of Subsidiary (LLC, PJLC or PRJSC)
- Secure Minimum Capital.
- Choose and Register a Company Name.
- Prepare and Submit Necessary Documents like a Memorandum of Association (MOA), Articles of Association (AoA), and Certificate of Good Standing for the parent company and Power of Attorney for the Subsidiary’s General Manager.
- Obtain Initial Approval from the Department of Economic Development (DED)
- Apply for a trade license
- Register with the chamber of commerce.
- Open a corporate bank account.
- Apply for employee and director Visas.
- Arrange office space.
Note: Before taking any step, consult with an expert.
Final Thoughts
We have discussed the subsidiary’s definition, its working, pros and cons with real examples for your deeper understanding. A subsidiary company provides the parent company with opportunities for expansion, innovation and risk management while maintaining operational independence. Setting up a subsidiary may seem complex, but with the right guidance, it can become a strategic move for long-term success.
Seamlessly Establish a Subsidiary Company Xpert Advisory’s Guidance
Opening a subsidiary in the UAE and overseas can be a complicated task, but with the help of Xpert Advisory, the process can be major simplified. Without requiring your physical presence, they offer top-notch guidance and help. Being a professional in its command, Xpert Advisory tackles your legal requirements seamlessly. So, what are you waiting for? Get in touch with us today to get started!
