What Are the Advantages & Disadvantages of Subsidiary Companies?

Companies range in size from small ones with one location and a few employees to large corporations and conglomerates with thousands of employees and locations throughout the world. Many large companies own a number of other companies called subsidiaries. Walt Disney Resorts and the American Broadcasting Company are subsidiaries of Walt Disney Company. Capri Sun Inc. and Veryfine Products are Kraft Foods subsidiaries. General Electric has more than 95 subsidiaries, including NBC and Universal Studios.

A subsidiary is a company with a majority of its stock owned by a parent company, a holding company or a company controlled by another entity. At least 50 percent of a company’s stock must be owned by another firm for the company to be considered a subsidiary. A wholly owned subsidiary is 100 percent controlled by another business. The parent can exert a high degree of control over corporate management and better ensure that business practices, trade secrets, expertise and technical knowledge remain in house.

There are a lot of reasons companies acquire other companies and retain their legal status as a subsidiary, and a lot of benefits for a smaller company becoming part of a larger corporate family. The monetary influence of a parent company cannot be overemphasized. The parent has the means of providing buying power, research and development funds, marketing money and know-how, employees, technical expertise and other features the smaller company could not afford or accomplish alone. The parent can provide the monetary means and capability to jump start new companies and products. The marketing power of the parent, such as the ability to place products in stores, can be a boon to a smaller company seeking to expand. Sometimes a company will set up a subsidiary for a portion of a company it plans to sell in the future. It is easier for a smaller subsidiary to form joint ventures and partnerships with other companies if it is not hindered by a larger corporate bureaucracy. Subsidiaries can borrow money and issue their own debt.

Perhaps the biggest advantage to a parent company of maintaining numerous subsidiaries is the tax and creditor protection benefits. The parent can offset profits from one subsidiary with losses from others. Liabilities attached to one subsidiary and legal actions against one company do not threaten the financial health of other subsidiaries or the parent organization. There are some state tax advantages to subsidiaries; state laws vary and specific state rules must be examined. There are advantages to maintaining foreign subsidiaries. Countries tax the income of subsidiaries and the foreign income would not be subject to U.S. income taxes.

A major disadvantage of being a subsidiary of a large organization is the limited freedom management may have to make major decisions, whether involving products, finance or other major topics. Issues often must go through various chains of command within the parent bureaucracy before any action can be taken. The extra legal and tax work involved can be a disadvantage for subsidiaries.