Subsidiary: types, advantages and disadvantages

Subsidiary is a company that is controlled by another company through a parent-child relationship. A company is only said to be a subsidiary company if the parent has a majority stake by owning more than 50% of the issued share capital. A single subsidiary can have subsidiaries. Subsidiaries are considered separate legal entities for tax and regulatory purposes.

Types of subsidiaries – Three types of Subsidiaries can be formed, namely:

-Limited public liability

-Minimum capital – Must be paid by the founders (minimum two members)

-Shares – You can issue registered or bearer shares

-Management – Must have at least three directors. A director must be a permanent resident of the country.

-Private limited liability

-Minimum capital – Must be paid by the founders

-Shared: shares must be registered. Bearer shares cannot be subscribed

-Management: managed by one or more managers

-Limited liability cooperative company

-Minimum capital – Three partners are needed. A quarter of the capital contribution must be paid

-Commissions: the shares are registered

-Management: a cooperative company with limited liability and managed by one or more managers

Parent company – Subsidiary relationship

It is important that the subsidiary is recognized as an independent corporation managed by the board of directors even though it was incorporated by the parent company. This does not mean that the subsidiary is not controlled. The parent company has the legal authority to hold the subsidiary accountable for meeting financial targets.

For the parent to control the independent subsidiary it must be:

-The sole shareholder

-Include voting control provisions in a subsidiary article.

-Prepare statutes that define the authority of the officers, their mandate and removal.

-Prohibit the modification of the bylaws without the approval of the shareholders.

Legal risks

As long as the parent company holds its subsidiary accountable for the expectations of its board of directors, there is little risk that the parent will be held liable for the wrongdoing of the subsidiary. But, if the parent company exerts excessive control, for example, it has the same board of directors, the use of common letterhead, in such case, the parent company and the subsidiary are treated as one and the parent company is liable. of the debts of the subsidiaries, etc.

Advantages and disadvantages of the subsidiary

Advantage

-Considerable tax advantages and legal protections

-Ability to offset the gains and losses of one part of a business with another.

-Some countries allow subsidiaries to file tax returns on profits earned in that country

-Credit claims and responsibilities are locked in that subsidiary and cannot be transferred to the parent company

-Allows the creation of joint ventures with other companies, each of which owns a part of the new business operation

Disadvantages

-The legal paperwork related to the creation of a subsidiary can be long and expensive

-Control also becomes a problem when a subsidiary is partially owned by another external organization