Loading the player...

What is a 'Subsidiary'

A subsidiary is a company with stock that is more than 50% controlled by another company, which is usually referred to as the parent company or the holding company.

The parent company holds a controlling interest in the subsidiary company, and in cases where a subsidiary is 100% owned by another firm, the subsidiary is referred to as a wholly owned subsidiary.

BREAKING DOWN 'Subsidiary'

Subsidiaries are separate and distinct legal entities from their parent companies, which reflects in the independence of their liabilities, taxation and governance. Given their controlling interest, however, parent companies, along with other subsidiary shareholders, vote to elect a subsidiary company's board of directors, and there may often be board member overlap between a subsidiary and its parent company. A parent company will typically aggregate financials from all its operations, including those of its subsidiaries, and carry these financials on its own consolidated financial statements. A parent company may own a foreign subsidiary, in which case the subsidiary must follow the laws of the country where it is incorporated and operates.

Subsidiary is an adjective that describes when something or someone serves to assist or supplement another thing or person. In a business setting, a subsidiary becomes part of a parent company to provide the parent with specific synergies, such as increased tax benefits, diversified risk, or assets in the form of earnings, equipment or property. The purchase of interest in a subsidiary differs from a merger in that the parent corporation can acquire a controlling interest with a smaller investment. Additionally, shareholder approval is not required in the formation of a subsidiary as it would be in the event of a merger.  

Consolidated and Unconsolidated Subsidiaries

While the term subsidiary refers to companies that are at least 50% controlled by another entity, an associate or affiliate company denotes a firm held as a minority stake by another entity. Aside from being held as a majority ownership stake, subsidiaries also differ from associate companies because a subsidiary's financial statements are typically consolidated for inclusion on the parent company's consolidated financial statements. 

As is common practice and per the Securities and Exchange Commission (SEC), public companies should generally consolidate all majority-owned firms, or subsidiaries. Consolidation is typically seen as a more meaningful method of accounting than providing separate financials for a parent company and each of its subsidiaries. For example, eBay reported total revenue on its consolidated income statement, for the year ended Dec. 31, 2017, of $9.6 billion. The e-commerce firm notes in the annual report that just over $1 billion of its total revenue came from its sole domestic and consolidated subsidiary, StubHub.

The SEC states that only in rare cases, such as when a subsidiary is undergoing bankruptcy, should a majority-owned subsidiary not be consolidated. An unconsolidated subsidiary is a subsidiary with financials that are not included in its parent company's financials. Ownership of such firms is typically treated as an equity investment and denoted as an asset on the parent company's balance sheet. For regulatory reasons, unconsolidated subsidiary firms are typically those in which parent firms do not have a significant stake.

Example of Subsidiaries and Their Benefits

Public companies are required by the SEC to disclose significant subsidiaries under Item 601 of Regulation S-K. Warren Buffett's Berkshire Hathaway Inc., for example, has a long and diverse list of subsidiaries, including Dairy Queen, Clayton Homes, Business Wire, GEICO Auto Insurance and Helzberg Diamonds. Berkshire Hathaway's acquisition of many diverse firms fall in accordance with Buffett's oft-discussed strategy of buying undervalued assets and holding onto them. In return, acquired subsidiaries can often continue to operate independently while gaining access to broader financial resources. An exhibit to Berkshire's annual filing, for the year ended Dec. 31, 2017, reveals that the firm owns upwards of 250 subsidiaries.

Like Berkshire Hathaway, Alphabet Inc. also has many subsidiaries. These separate business entities all perform unique operations that add value to Alphabet through diversification, revenue, earnings, and research and development (R&D). For example, Sidewalk Labs, a small startup that is a subsidiary of Alphabet, seeks to modernize public transit in the United States. The company has developed a public transportation management system that aggregates millions of data points from smartphones, cars and Wi-Fi hotspots to analyze and predict where traffic and commuters are most congregated. The system can redirect public transportation resources, such as buses, to these congested areas to keep the public transit system moving efficiently.

For Alphabet, Sidewalk Labs provides it with a business unit that develops technology that can one day help the entire company. Since one of Alphabet's largest products is Google Maps, subsidiaries such as Sidewalk Labs can strengthen the company's overall business operations.

  1. Letter Of Moral Intent

    A letter of moral intent is written to a bank from a parent company ...
  2. Holding Company

    A holding company is a parent corporation that owns enough voting ...
  3. Consolidate

    To consolidate is to combine assets, liabilities, and other financial ...
  4. Consolidation

    Consolidation is a technical analysis term referring to security ...
  5. Combined Statement

    A combined statement aggregates information on a retail banking ...
  6. Taxable Spinoff

    A taxable spinoff is a divestiture of a subsidiary or division ...
Related Articles
  1. Investing

    Sneaky Subsidiary Tricks Can Cloud Financials

    Use consolidated financial statements to uncover a parent company's true performance.
  2. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  3. Investing

    What is a Spinoff?

    Businesses wishing to streamline their operations often sell less productive or unrelated subsidiary businesses as spinoffs.
  4. Investing

    Caterpillar Offices Raided, Agents Seek Info on Possible Tax Avoidance

    Report suggests company failed to disclose billions for tax accounting
  5. Managing Wealth

    How To Parent Your Aging Parents

    For sandwich generation, planning ahead is key to good elder care.
  6. Investing

    Alphabet Subsidiary Access Is Reinventing Itself

    The Alphabet subsidiary moved workers to other units within the conglomerate and hired a new CEO.
  7. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  8. Retirement

    Tips for Helping an Aging Parent

    Many Millennials and Gen Xers find themselves unexpectedly caring for their aging parents.
  9. Investing

    Spotting Creative Accounting on the Balance Sheet

    Companies have used creative accounting as a way of manipulating their balance sheets.
  1. What are the Differences Between Affiliate, Associate and Subsidiary Companies?

    The main difference between affiliate, associate and subsidiary companies has to do with the existing level of ownership ... Read Answer >>
  2. What is the difference between a subsidiary and a sister company?

    Discover the differences between subsidiary companies and sister companies, and understand how both are related to parent ... Read Answer >>
  3. How do spinoffs impact investors in the both the parent and subsidiary companies?

    Learn about how spinoffs affect investors in both the parent company and the subsidiary and what strategies investors use ... Read Answer >>
  4. How is taxation treated during a company spinoff?

    Learn how the potential tax implications of a spinoff can affect both parent and subsidiary companies and how taxes may be ... Read Answer >>
Trading Center