How To Create a Subsidiary Under My Corporation
Understanding how to create a subsidiary under my corporation first requires understanding what a subsidiary is.3 min read
Updated November 19, 2020:
Understanding how to create a subsidiary under my corporation first requires understanding what a subsidiary is. A subsidiary is a business that is owned wholly or majority owned by another corporation. The subsidiary, most often, operates in a complementary service to the parent company. Saturn is an example of a subsidiary under General Motors Corporation.
To answer the question of how to create a subsidiary under my corporation, understanding the restrictions put forth by the IRS should be first priority. The parent company, or S corporation, must own 50.1 percent or more of the stock, membership interests, or other equity of the subsidiary. An S corporation is another term for a regular corporation that is formed when the articles of incorporation are filed with the secretary of state. S corporations pay taxes on the income as it is distributed, not on a corporate level. When dealing with existing corporations, or S-corporations, certain restrictions are in place by the IRS. Some of the restrictions include that:
- there can be no more than 100 shareholders
- the owners must be U.S. citizens or permanent residents
- the S-corporation can own no more than 80 percent of the stock of another corporation
- that S-corporations cannot wholly own a subsidiary, but a majority ownership is allowed
Steps Required to Create a Subsidiary Under an Existing Corporation
The creation of a subsidiary under an S Corporation requires that specific steps be followed to confirm they fall under the stipulations of the Internal Revenue Code.
- The board of directors must meet to authorize and vote to form a new subsidiary. If the board votes and it passes by a majority, a resolution should be drafted and signed by the chairman of the board to document the ruling. All actions within this meeting should be recorded in the meeting minutes and archived for future reference.
- The type of entity must be selected, such as an LLC or a corporation. These options allow for the existing company to maintain and hold all interest in the subsidiary while also allowing independent legal status to be established in relation to liability. In this case, the liability of each company is separate. The entity type decision has important tax implications and should be thought out before selected.
- Draft the documents required by state law that explains the company formation. Each state will have specific requirements for the type of business. For example, articles of incorporation for a corporation, or articles of organization for an LLC. State requirements vary but typically include the new company name, business address, and the name and address of the registered agent who can receive and accept mail on behalf of the company. The articles must include if the existing company is a sole shareholder or owner of the new company. A provision stating that amending the articles is prohibited should be listed.
- File all required documents and pay the specified fee with the state business registrar. The secretary of state's office in most states accepts new business filings. The secretary of state's websites are the most efficient way to obtain instructions and approved templates for both articles of incorporation and organization. When the filing has been accepted by the state, the company is deemed to exist.
- Add capital to the new entity and transfer any necessary assets so it can begin operations. The capital and assets are made in exchange for the company's ownership interest in the new subsidiary. All transactions should be recorded in the subsidiary's accounting software as a credit to the parent company.
- The subsidiary's bylaws must be established. Draft the bylaws which must include how the parent company will proceed in nominating, accepting, or changing members of the board of directors. The bylaws must also include the stipulation that any changes to the bylaws are prohibited unless permission has been granted by the parent company who is the sole owner.
- A board of directors must be appointed and installed. The board is tasked to manage the subsidiary as an independent entity from the parent company.
Once the board of directors is put into place and they begin to manage the subsidiary, the company is considered a fully functioning entity.
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