The difference between a subsidiary and a sister company lies in their relationship to the parent company and to each other.

A parent company is the owner of separate corporations known as subsidiaries. The parent company's control stems from either owning the subsidiary company outright or from holding a controlling interest in the company's stock. Subsidiaries are sometimes deliberately formed by the parent company to segment its business. While the parent company is commonly larger than any of its subsidiaries, that does not necessarily have to be the case.

A subsidiary functions as a separate legal entity rather than as a division of the parent company. A subsidiary company is sometimes referred to as a daughter company. A subsidiary company is also capable of having controlling interest in its own set of subsidiary companies.

Advantages for companies in having operational control over a subsidiary company include the right of the parent company to file a consolidated tax return. This type of corporate tax return offers more simplified filing for both the parent company and its subsidiaries, and it also offers tax benefits not otherwise available to the parent company. Consolidated tax filing offers the parent company the ability to offset gains and losses between different subsidiaries to lower the company's overall taxable revenue.

Sister companies are subsidiary companies that are related by virtue of being owned by the same parent company. Each sister company is independent of the other sister companies, and the only relationship between them may be their common relationship to the parent company. Sister companies may produce a range of products that are quite different from each other or from those of the parent company. Sister companies may even be competitors, in some instances. However, there are sometimes arrangements between sister companies for information sharing or special pricing. In instances where sister companies have a common target market, the companies can reap the benefits of reduced costs from sharing marketing and advertising materials.

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