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A subsidiary is a company that is controlled by another "parent" company. The subsidiary acts and operates like its own entity but it still is connected with the larger company. The parent company can create a subsidiary in one of two ways: By creating it from within the parent company or by acquiring controlling interest in an outside entity. When there is majority ownership or control, the investor corporation guides the resources, business policies and operating decisions of the subsidiary.

There are several advantages to the parent company in acquiring or forming a subsidiary. For example, a company with multiple brands may create subsidiary companies to keep its brand identities separate and increase brand recognition. Financial considerations are another issue that may influence creation of a subsidiary, such as when a company wants to sell off an unprofitable business center without disrupting the overall operation of the business. In this case, organizing it as a subsidiary and subsequently selling it off would achieve that goal. A company can also raise capital by selling off stock in the subsidiary without affecting the parent company's stock. 

Subsidiaries and Combined Financials Statements

Subsidiaries also let a company keep certain business operations private and avoid disclosure under SEC requirements by keeping the subsidiary privately held. This is especially advantageous when a company is developing a new product. 

Financial statements are prepared the same for the subsidiary as they are for the parent company. However, in addition, consolidated balance sheets are prepared. This is the combined financials statements of the parent company and all of its subsidiaries. The consolidated financial statements give a valuable overview of how well the entire corporation is being managed and are useful in valuing the company as a whole. On the balance sheets, the shares owned by outsiders are shown on the balance sheet as an item. The consolidated balance sheet also includes foreign subsidiaries. However, it is sometimes difficult to convert the financial statements of a foreign subsidiary back into the parent company's currency. (See also: What You Need To Know About Financial Statements.)

When a company is listed on the stock exchange, the information found on the financial statements is consolidated. The true value of a company cannot be properly accounted for if all the parts are not brought together. The decisions and quality of management offered from the parent company affect the subsidiary, therefore making it crucial that one also has knowledge of the parent company when analyzing a subsidiary. (See also: Reading the Balance Sheet and Breaking Down the Balance Sheet.)

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RELATED TERMS
  1. Subsidiary

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  2. Parent Company

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  4. Combined Statement

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  5. Letter Of Moral Intent

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  6. Consolidation

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