What Is an Independent Subsidiary?
As a business grows over time, the complexities of managing the various elements also increase. Every bit of diversification, whether from internal sources or acquiring other businesses, adds to the problem of successfully managing the entire operation. When companies reach a point that size or diversification begins to pose too many challenges, some companies choose to establish independent subsidiaries to manage the complexity.
The relationship between the parent company and an independent subsidiary tends to be limited. The parent company typically functions as the sole stock owner, or at least maintains a controlling interest. This makes the subsidiary financially accountable to the parent in the same way public companies are accountable to stockholders. The parent company typically elects the board of directors for the subsidiary and in the development of the subsidiary’s bylaws but otherwise does not interfere in the hiring or firing of executives and staff.
A company may establish a subsidiary for a variety of reasons. In some cases, the business may be engaging in two related lines of business, but only one truly fits the mission statement of the business. A company that builds houses, for example, might spin off a subsidiary to handle roofing work and the parent company focuses on house building. A company may find itself in a position to buy another business but would prefer not to manage it, so it creates a subsidiary. Sometimes a company wishes to pursue a new venture but wants to limit the financial risks.
Setting up an independent subsidiary allows a company to take advantage of business opportunities such as purchasing a successful business with a lot of potential without assuming the managerial responsibilities that typically come with running a business. Companies also can use subsidiaries to offset profits in one part of company, such as a newly acquired subsidiary that posts a loss for the year supported by a profitable parent company. This lowers to total taxes due for the company as whole when filing a consolidated federal return.
Independent subsidiaries that actually operate as independent businesses provide considerable liability protection for the parent company. If, for example, the roofing subsidiary overextended itself and creditors sued, the assets of the parent company that builds houses generally remain immune from legal actions taken against the roofing subsidiary. The parent company still would suffer financial losses as the primary or sole stockholder of the subsidiary but no more than any other stockholder in a company