A subsidiary is a company that is controlled by a parent company. The parent company does not necessarily need to be larger than the subsidiary. Additionally, the parent company does not need to completely own the subsidiary -- it needs only to control the subsidiary. Generally, this can be achieved by owning at least 50 percent of the voting equity in the subsidiary. There are a number of reasons why a company may choose to operate as a subsidiary rather than as a division within the parent company.
Many companies will choose to keep a subsidiary separate from the parent company in order to preserve the brand image and name of the subsidiary. For example, a large fast food chain that acquires a smaller chain in a niche market may wish to retain the image of the smaller business as an alternative to the larger chain. If the smaller company is associated too closely with the larger chain, consumers may lose their opinion of the subsidiary as a unique alternative.
Legally, the liability of a corporation belongs only to the corporation and not to its shareholders. Because a parent company is essentially a shareholder of the subsidiary, keeping the two entities legally separate is a way to shield the parent company from a majority of the liability that could result from the subsidiary.
An initial public offering (IPO) is a process through which a company makes its equity available to the public. It is the process of changing from a private company to a public company. A parent company that controls a subsidiary can position the company for an IPO without directly affecting the stock price of the parent company and its shareholders.
The Public/Private Distinction
Under federal securities law a public company must disclose substantial information to the U.S. Securities and Exchange Commission, and that information is then made available to the general public. A private company does not have to disclose that same level of information. As a result, a company can keep more of its subsidiary's information secret if it remains a subsidiary as opposed to a division within the public company.
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