Subsidiary Company: Definition, Example, and How It Works


Investopedia / Paige McLaughlin

What Is a Subsidiary?

In the corporate world, a subsidiary is a company that belongs to another company, which is usually referred to as the parent company or the holding company.

The parent holds a controlling interest in the subsidiary company, meaning it has or controls more than half of its stock. In cases where a subsidiary is 100% owned by another firm, the subsidiary is referred to as a wholly owned subsidiary. Subsidiaries become very important when discussing a reverse triangle mortgage.

Key Takeaways

  • A subsidiary is an independent company that is more than 50% owned by another firm—called the parent company or holding company.
  • Subsidiaries are separate and distinct legal entities from their parent companies.
  • Companies buy or establish a subsidiary to obtain specific synergies or assets, secure tax advantages, and contain/limit losses.
  • Shareholder approval is not required to turn a company into a subsidiary or to sell a subsidiary.
  • A subsidiary's financials are reported on the parent's consolidated financial statements.


Are Subsidiaries Separate Companies?

Subsidiaries are separate and distinct legal entities from their parent companies, which reflects in the independence of their liabilities, taxation, and governance. If a parent company owns a subsidiary in a foreign land, the subsidiary must follow the laws of the country where it is incorporated and operates.

However, given their controlling interest, parent companies often have considerable influence over their subsidiaries. They—along with other subsidiary shareholders, if any—vote to elect a subsidiary company's board of directors, and there may often be a board-member overlap between a subsidiary and its parent company.

To be designated a subsidiary, at least 50% of a firm's equity has to be controlled by another entity. Anything less, and the firm is considered an associate or affiliate company.

Subsidiary Financials

A subsidiary usually prepares independent financial statements. Typically, these are sent to the parent, which will aggregate them—as it does financials from all its operations—and carry them on its consolidated financial statements. In contrast, an associate company's financials are not combined with the parent's. Instead, the parent registers the value of its stake in the associate as an asset on its balance sheet.

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.

The Securities and Exchange Commission (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 statements. 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.

Subsidiary Advantages: What Is the Purpose of Subsidiaries?

The purchase of an interest in a subsidiary differs from a merger: The purchase usually costs the parent corporation a smaller investment, and shareholder approval is not required to turn a company into a subsidiary as it would be in the event of a merger. Nor is a vote required to sell the subsidiary.

A parent company buys or establishes a subsidiary to obtain specific synergies, such as increased tax benefits, diversified risk, or assets in the form of earnings, equipment, or property.

Subsidiaries can contain and limit problems for a parent company. Potential losses to the parent company can be limited by using the subsidiary as a kind of liability shield against financial losses or lawsuits. Entertainment companies often set individual movies, or TV shows up as separate subsidiaries for this reason.

Subsidiaries can be the experimental ground for different organizational structures, manufacturing techniques, and types of products.

The subsidiary structure may offer tax advantages, too: They might only be subject to taxes in their state or country, versus having to pay for all the parent's profits.

  • Contained/limited losses

  • Tax advantages

  • Easier to establish and sell

  • Synergy with other corporate divisions, subsidiaries

  • Extra legal, accounting work

  • Greater bureaucracy

  • Complex financial statements

  • Liability for subsidiary's actions, debts

Subsidiary Disadvantages

Subsidiaries also have a few drawbacks. Aggregating and consolidating a subsidiary's financials make a parent's accounting more complicated and complex.

Since subsidiaries must remain independent to some degree, transactions with the parent may have to be "at arm's length," and the parent may not have all the control it wishes. Yet the parent may also be liable for criminal actions or corporate malfeasance by the subsidiary. It may have to guarantee the subsidiary's loans, leaving it exposed to financial losses.

Real World Example of Subsidiaries 

Public companies are required by the SEC to disclose significant subsidiaries. Warren Buffett's Berkshire Hathaway Inc., for example, has a long and diverse list of subsidiary companies, including Dairy Queen, Clayton Homes, Business Wire, GEICO, and Helzberg Diamonds.

Image by Sabrina Jiang © Investopedia 2020

Berkshire Hathaway's acquisition of many diverse firms follows 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. 

Like Berkshire Hathaway, Alphabet Inc. 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.

Sidewalk Labs provides Alphabet 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.

What Are Two Subsidiaries Called?

Two or more subsidiaries majority owned by the same parent company are called sister

Is a Subsidiary its Own Company?

Yes. A subsidiary is independent, operating as a separate and distinct entity from its parent company. That said, the parent company, as a majority owner, can influence how its subsidiary is run and may be, for example, liable for the subsidiary's negligence and debt.

Does a Subsidiary Have its Own CEO?

As a subsidiary functions as a separate entity, it usually has its own management team and CEO. The parent company will, however, get a significant say in who runs the company and sits on its board of directors.

The Bottom Line

A subsidiary is a company that is completely or partially owned by another company. Acquiring and establishing subsidiaries is fairly common among publicly traded companies, especially in certain industries such as tech and real estate. The advantages of these business structures include tax benefits, reducing risk, and increased efficiencies and diversification. Drawbacks, meanwhile, include limited control and greater bureaucracy and legal costs.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Financial Accounting Standards Board. "Summary of Statement No. 94."

  2. Securities and Exchange Commission. "Final Rule: Financial Statements and Periodic Reports For Related Issuers and Guarantors."

  3. Berkshire Hathaway. "Subsidiaries."

  4. Sidewalk Labs. "About Us."