Many people incorrectly use the words "subsidiary" and "sister company" interchangeably, when these two terms have entirely separate meanings. Simply put, a subsidiary refers to a corporation that a parent company either fully owns or holds a controlling interest in. Conversely, sister companies refer to subsidiaries that are related solely by virtue of the fact that they are owned by the same parent company.

Key Takeaways

  • The difference between a subsidiary and a sister company lies in their relationship to the parent company and to each other.
  • By definition, parent companies own one or more separate corporations, known as subsidiaries.
  • Sister companies are subsidiaries that are related because they're owned by the same parent company.

Subsidiary

A subsidiary may either be a preexisting corporation that a parent company acquires, or it may be an entity that a parent company creates anew, in order to broaden its consumer base. Sometimes referred to as daughter companies, subsidiaries function as independent legal entities, rather than as divisions of a parent company. Interestingly, it is theoretically possible for a subsidiary company to control its own subsidiary or sets of subsidiary companies.

Parent companies may file a consolidated tax return, which can radically simplify the corporate tax calculations for both the parent company and its subsidiaries. Furthermore, parent companies enjoy the ability to offset gains and losses between subsidiaries in an effort to lower their overall taxable revenue.

Sister Company

Sister companies are subsidiaries that are related to one another by virtue of the fact that they share a common parent entity. Each sister company operates independently from the others, and in most cases, they produce unrelated product lines.

In rarer cases, sister companies are direct rivals who operate in the same space. In such situations, after becoming sisters, the parent company often imposes separate branding strategies in a concerted effort to distinguish sister companies. This helps each sister reach distinct markets, thus boosting their individual chances for success.

There are exceptions to this rule, however, when sister companies join forces. This may entail consolidating marketing desks or offering one other special pricing on their respective inventories. For example, a fabric manufacturer may work with a furniture retailer to jointly produce and market a line of upholstered goods.

Sister companies with common target markets may reduce costs by sharing the same vendors and suppliers in order to snag cheaper rates.

Blurring the Lines

As a company grows into a conglomerate, the divisions between its subsidiaries and its sister companies may grow fuzzy. For example, while multimedia giant Viacom Inc. counts Viacom Media Networks as a subsidiary, Viacom Media Networks’ underlying array of cable channels, including Nickelodeon, BET, and Spike, are considered sister companies. By owning these channels, advertising packages can be purchased more cheaply and efficiently.

Gap stores are well-known to consumers, but Gap Inc. is actually the parent company of Old Navy, Athleta, Banana Republic, Intermix, and several other familiar retail chains. In effect, each of these is a sister company that occupies its own market niche.