Subsidiary: Overview, definition and example
What is a subsidiary?
A subsidiary is a company that is controlled by another company, known as the parent company. The parent company usually owns more than 50% of the subsidiary’s shares, giving it the authority to influence or dictate major decisions. However, the subsidiary operates as a separate legal entity with its own management and responsibilities.
For example, a large retail corporation might own a smaller logistics company as a subsidiary to handle its deliveries and supply chain.
Why is a subsidiary important?
Subsidiaries are important because they allow a parent company to expand into new markets, diversify its operations, or manage different business units more effectively. The separate legal structure of a subsidiary helps limit the parent company’s liability if the subsidiary faces legal or financial troubles.
For businesses, subsidiaries provide flexibility in managing operations while keeping risks contained.
Understanding subsidiaries through an example
Imagine a global tech company creates a subsidiary to manage its operations in Europe. The subsidiary has its own team, office, and financial statements, but the parent company controls its major decisions, such as approving budgets or launching new products. This setup helps the parent company adapt to local regulations and market needs without exposing the entire business to regional risks.
In another example, a car manufacturer owns a subsidiary that produces electric vehicle batteries. The subsidiary focuses entirely on battery development and manufacturing, allowing the parent company to concentrate on car production while still benefiting from advancements in battery technology.
An example of a subsidiary clause
Here’s how a subsidiary clause might look in a contract:
“For the purposes of this Agreement, the term ‘Subsidiary’ shall mean any entity in which a Party owns, directly or indirectly, more than 50% of the voting shares or exercises control over its management and policies.”
Conclusion
A subsidiary is a company controlled by a parent company but operates as a separate legal entity. It’s a valuable tool for managing operations, entering new markets, or diversifying a business.
By understanding subsidiaries, businesses can structure their operations more effectively, balance risks, and maximize opportunities for growth. It’s about creating a strong, flexible foundation for success.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.