What is a Subsidiary Company?
Any parent company or holding company that has a voting stock of more than 50% of the stock of any company, then the later is known as a subsidiary company. The parent may have full ownership or partial ownership of the subsidiary company based on which it has the controlling rights of the subsidiary company. If any foreign parent company owns any subsidiary company then it is mandatory that the subsidiary company follows the foreign laws as per the parent company’s incorporation for all operations. The parent company has to follow the financial statements in which the subsidiary company’s financials are also consolidated.
Breaking Down ‘Subsidiary’
The term “Subsidiary” defines that any company, individual or supplement that serves the purpose of assisting or supplementing another company or individual. In any business setup, the subsidiary company offers specific strategy related benefits like better tax exemptions, diversifies risks, assets, equipment or properties. Even in the case of liabilities, taxations, and regulations, the subsidiary company is considered as a legal entity.
The interest of purchasing the entire company or part of the subsidiary company depends on the discretion of the parent company which is decided during the merger. If the parent company wants, it can fully acquire the subsidiary company with controlling rights or partially with minimal investments. In such scenarios, the approval of the shareholders or stockholders is not necessary for forming the subsidiary company as in the case of a merger. For example, the famous company of Warren Buffett namely Berkshire Hathaway Inc. has many companies to its list across the world which also include Clayton Homes, Pampered Chef and many more.
How a Subsidiary Operates
All the subsidiary companies incorporated by the parent company perform individual operations and ultimately adding value to the parent company. For example, the Berkshire Hathaway’s Alphabet Inc. has many subsidiaries. However, all these individual business entities perform different types of operations which lead to the Alphabet including the revenue, assets, and research & development (R&D).
Another example that one can refer is to the Sidewalk Labs which is a small subsidiary of the Alphabet Inc., looking forward to offering advanced public transit systems in the United States (US). The company has laid millions of data points systems known as Flow across the public transportation network which aggregates the information from smartphones, cars, Wi-Fi hotspots, etc. to collect, parse and analyze the information to predict the traffic or where commuters are most gathered. With the help of the intelligent system and analytical data, it becomes much easier for the buses, commuters, and even public transit systems to guide the vehicles to less crowded routes resulting in efficient traffic management.
Currently, as on 28th June 2016, the Flow pilot project is successfully running in large scale across Columbus, Ohio. In order to provide a separate identity of its own, Sidewalk Labs has provided a separate business unit to it which will ultimately be adding to the benefits of Alphabet. The major asset of Alphabet company is the Google Maps, and new innovations by the Sidewalk Labs will further strengthen its portfolio and business operations.