Can a Company Own a Company: Everything You Need to Know
A subsidiary is created when a company owns another company. Creating a subsidiary can be a complicated process that varies depending on the location.3 min read
Can a company own a company? Yes, a subsidiary is created when a company owns another company. Creating a subsidiary can be a complicated process that varies depending on the location of the parent company.
What Is a Subsidiary Company?
When a company owns another company, this other company is referred to as a subsidiary. The company that owns the subsidiary is called the parent company or a holding company. The subsidiary can have many parent companies, or it may just be owned by one company.
Here are the main differences between a holding company and a parent company:
- Holding company: Owns a lot of stock of other subsidiaries. This is sometimes called a controlling share. A holding company does not have its own daily operations.
- Parent company: An individual company with subsidiaries that may run a similarly related business. One of its subsidiaries may actually own or sometimes manage some parent company assets to keep liability separate.
Reasons to Create a Subsidiary
Subsidiaries are a very common form of business. Because they keep things separate and safe, they are a good way for companies to protect assets and keep liabilities separate. Being a separate company means a subsidiary keeps its own financial records, bank accounts, assets, and liabilities.
How to Create a Subsidiary
When you register in the state where the company is located, you can create a subsidiary. Make sure it is clear that the subsidiary is owned by the main company.
A subsidiary acts like a regular company with oversight from the parent company. There is no daily supervising of the subsidiary from the parent.
Taxing and Accounting for Subsidiaries
A subsidiary is a completely separate company — including with regards to its main financial records. Also, if there are some interactions that happen regarding the subsidiary and the parent company, they have to be recorded. Some companies file combined financial statements for shareholders.
Each subsidiary also has a tax ID number and pays taxes. A parent company has a combined tax return if it owns 80 percent (or more) of the subsidiary.
If there is legal action taken against the parent company, the liability could be passed to the other companies below it. Any legal action that happens to the parent company can happen to the subsidiary.
Subsidiaries are complicated. You may want to hire both a tax or accounting professional to help start your subsidiary.
Differences Between Subsidiary, Affiliate, and Associate
- Subsidiary — half (or more) of the company is owned by a parent company.
- Associate company — the parent company does not own controlling shares.
- Affiliate company — owns 49 percent or less.
What Business Can an LLC Own
Business owners usually own multiple businesses to protect assets by adding a different type of business to their portfolio. This also means additional administrative costs. Many businesses try to reduce these extra expenses through a series LLC or making one LLC the holding company for some other LLCs.
This forms a business structure with many layers and with that comes federal and state tax implications. Some businesses with many combinations and layers are not allowed by state statute or federal tax law.
Can an LLC Own Another LLC?
Here are the two ways an LLC can own another LLC:
- An LLC can own many single-member LLCs using the holding company structure.
- An LLC can be a master business and own many LLC cells. Some states do now allow this option.
A holding company LLC only needs to file one tax return that reports all income/expenses.
When a single LLC acts as a master business, it forms a series LLC, which is formed of individual LLCs called cells. Each LLC cell must have its own banking account. Sometimes it is okay to file a single set of tax returns for the series of LLCs. Remember, the ability to form a series LLC depends on your state.
It may be difficult to actually preserve the limited liability for each company in the states that do not formally recognize the aeries LLC.
Can an LLC Own an S Corporation?
No, because shareholders in an S corporation have to be individuals, or sometimes a trust or an estate.
Can an LLC Own a C Corporation?
Yes, but if this happens, the IRS will think of the C corporation as a separate for federal tax purposes.
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