Subsidiary company is a company that is under the control and direction of a parent company, although they have a certain degree of autonomy to carry out actions and make internal decisions, but always under the domain of a larger company that owns most of its shares.
Subsidiary companies are those that are under the control of other companies that bear the parent name to which they belong, these are mainly due to the fact that the parent company has the authority to control a large number of different priority actions, which entails to be the dominant company.
Despite this, the subsidiary companies have a high level of independence, since they have different corporate relationships with the parent company. This is due to the fact that the subsidiary companies have their own management and control bodies and, in turn, have their own capital.
Objective of subsidiary companies
The existing objective in certain business functions, are based on the formation of various subsidiary companies and affiliates, it is very important to understand that there are large international companies or also known as business holdings.
Although the parent company can usually control most of the shares of the subsidiary companies, this allows them to take control and assume responsibility for all their decisions related to the financial and operational system.
This type of business practice responds to different reasons that focus on finding a way to increase the number of businesses and in turn transform the possibilities of risks, this leads to the alternative of carrying out an adequate process of vertical integration.
Characteristics of a subsidiary company
As we previously mentioned, the parent company allows subsidiary companies to have control and responsibility for their actions and decisions , therefore, in relation to this, some characteristics related to this type of company can be mentioned, such as the following:
- They are determined as legal and economic units.
- In these companies you can set various objectives.
- They can organize and integrate resources, whether their own or others.
- They use the administration of a parent company to carry out their own operating system.
- Its operating system is in accordance with updated labor, health, fiscal and ecological laws, among others.
- They are based on purchase and sale negotiations.
- They focus on constantly improving their products, their process, and the quality of their services.
Accounting of subsidiary companies
When a given parent company controls its financial statements, it may have a need to account for its affiliated companies. That is why the International Society for Financial Training Standards usually applies some accounting standards that are included in international regulations.
These regulations are carried out by the other companies and in turn must account for them. This defines that the parent companies have the duty to present the consolidated financial statements, which account for all their subsidiary or affiliated companies.
Types of subsidiary companies
Some of these companies have their beginnings as independent companies, however, in the future they end up pointing their assets to the big companies . When these large companies acquire the majority of their shares or consolidate some type of agreement with the owners of the subsidiary company, they become a subsidiary company.
There are other companies that are developed outside the parent company, beginning with divisions that are increasing, but in the end they function under the control of the parent company, however, many of their functions can be carried out with their own autonomy, such as the sale of their own products and determine internal decisions.
Other companies only work at the service of the parent company and have little autonomy regarding the decisions of their own productions and operations.
What is the principle of subsidiarity applied in the business world?
These types of companies are based on the principle of subsidiarity , which confirms that any operation must be exercised by whoever is closest to it. Which means that this type of company is under the control of a larger company.
This domain is generally carried out through the majority purchase of the shares of the subsidiary company, that is, for this type of company to exist, there must be another of a higher rank, such as the parent company.
Many companies do not start out as subsidiary affiliates, some begin the journey of their functions independently until the parent company decides to acquire it.
Advantages and Disadvantages of Subsidiary Companies
There are many advantages and disadvantages that must be taken into account in case you want to use them as strategies. Among them we can highlight the following:
Advantages of subsidiary company
- From the point of view of this type of company, the inconveniences that are linked to the financial system are significantly reduced.
- A parent company is made with the shares of this type of company, in this way the expense of forming a new company will be saved and at the same time, the fixed expenses significantly.
- In relation to the various strategies applied by the market, the parent companies manage to acquire from the subsidiaries, obtain high market shares, which will help to reduce the closest competitiveness.
- This type of company may decide to be part of a parent company in order to obtain a financial subsidy that is greater than what it already has, which can help it grow as a company and also expand.
Disadvantages of subsidiary company
- It is a business model that does not adapt to any type of product or service that is within the competition of the market.
- This type of company generally has many limitations in relation to its autonomy, since it depends totally on the main or parent company.
- A parent company has the duty to strictly control the accounting system of this type of company.
Examples of subsidiary company
- An example that we can highlight of the usefulness of this type of company is the one offered by the renowned tobacco company Philip Morris. This large company made the decision to be the majority shareholder of Coltabaco, a company in the same sector. Achieving in this way, expand to all of Latin America, without making any kind of interference in the usual work of the affiliate or subsidiary company.
- The consumer electronics giant Apple has subsidiaries that are responsible for the production of mechanical and electronic components. These will later be used by the parent company to assemble their phones, tablets and laptops. This subsidiary works autonomously and follows its own business life alternatively from supplying components to its parent company.
- Another descriptive example of the utility that can be given to the existence of subsidiary companies is offered by the well-known tobacco company Philip Morris. This large company decided to take over a large part of the shareholding of Coltabaco, a Colombian company in the same sector. In this way, he was able to extend his work map to Latin America, without interfering in the subordinate’s usual work.