What Is a Parent Company Subsidiary Relationship?
A parent company subsidiary relationship exists when one company controls another by owning majority voting stock.3 min read
Updated October 12,2020:
A parent company subsidiary relationship exists when one company controls another by owning majority voting stock.
What Is a Parent Company?
When one company controls another, this is known as a parent company subsidiary relationship. Typically, a parent company is created when a company purchases a controlling amount of voting stock in another company. Usually, a parent company is a large company that owns a smaller company. The subsidiary company can be in the same industry as the parent company or can be in a related industry. A parent company may own a variety of small subsidiary companies.
Parent companies can be directly involved in the operations of the subsidiary company, or they can take a completely hands-off approach. For instance, the parent company can allow the subsidiary company to retain its managerial control. Subsidiary companies can be wholly or partially owned by a parent company, but a parent company is required to own over half of the voting stock in the subsidiary company.
Holding companies and conglomerates are two different types of parent companies. Conglomerates are large companies that maintain their own business ventures while also owning smaller companies. Holding companies have no business ventures of their own. The only purpose of a holding company is to own subsidiary companies.
The main reason to form a holding company is to have access to tax advantages. There are multiple ways that a company can become a parent company. First, the company could acquire existing smaller companies. Second, the prospective parent company could create its own subsidiaries. If a subsidiary company is included in the parent company's corporate identity, the parent company will need to use audited statements to report subsidiary results.
Parent Company Subsidiary Relationship Explanation
When one business owns enough stock in another company to control that company's operations, a parent company subsidiary relationship has been created. Parent companies can either establish their own subsidiaries or can purchase an existing company.
Despite the name “parent company,” the relationship between a parent company and its subsidiaries is not the same as a parent and child relationship. While the parent company does hold influence over the subsidiary company, the subsidiary is a legally independent entity.
Whether the parent company is the sole or majority stockholder of the subsidiary company, it will have virtually total control of the subsidiary company's operations. As a majority stockholder, the parent company has the ability to remove or appoint board members for the subsidiary company and is also allowed to decide how the subsidiary will operate. That being said, subsidiary companies do retain some rights.
As the subsidiary company maintains some independence, it will have a variety of responsibilities:
- Management of the subsidiary by company directors.
- Decisions made by the directors should be in the subsidiary's, not the parent company's, best interest.
- Subsidiary directors must follow the same regulations and corporate laws as normal corporation directors.
- Directors are not required to report to the board of directors of the parent company.
While subsidiary company directors are allowed to manage the company as they see fit, the parent company can remove the directors in the event of unsatisfactory performance. Allowing directors to run the subsidiary company without constant oversight is generally a much better solution than the parent company dictating operations.
Parent companies have several methods for controlling subsidiary companies without infringing on their independence. The ability to fire board members and hire new ones is a useful method for a parent company to control its subsidiaries. This power, however, can be strengthened.
For instance, a parent company can give itself additional control of the subsidiary company by writing the Articles of Incorporation with a variety of provisions:
- Preventing the subsidiary from amending the Articles of Incorporation without parent company approval.
- Limiting the subsidiary corporate officers' authority in company bylaws.
- Using the bylaws to clearly outline how directors can be removed and elected.
If the parent company wants, it can appoint its own directors to the board of the subsidiary company. There are, however, some disadvantages for this practice. For example, this can make it difficult for the directors to make decisions, as they will be pulled between the interests of the parent company and those of the subsidiary.
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