What Is a Subsidiary Company and How Does It Work?

Expanding your business is exciting, but it can also be risky. Every time you open a new branch, you face new financial and legal issues. Your company as a whole may bear increased risk if the new branch loses money or gets sued.

Corporations can decrease their liability while growing their businesses by using subsidiaries. Subsidiary companies are considered legally separate entities from the companies that own them. A business may choose to own subsidiaries for several important reasons.

This article explains what subsidiaries are, how they work, why companies own them, and how businesses acquire them.

What is a subsidiary?

A subsidiary company is a business entity that another company has full or partial ownership over. Typically, a subsidiary is a corporation or a limited liability company (LLC).

Two types of companies have this subsidiary ownership:

• Parent companies have business operations of their own
• Holding companies are made up of stockholders who own assets. This type of company exists solely to own and manage its subsidiaries

A company is considered a subsidiary of another company if the parent organization owns more than 50% of its stock. The parent company or holding company uses its majority control voting rights to wield influence over the business operations of the subsidiary company.

When the controlling company has full control (owns 100%) of a company, the owned company is known as a “wholly owned subsidiary company.” However, if a corporation owns from 20% to 50% of another company and has significant influence but not majority control, the subsidiary is called an “associate company.”

Why do companies create subsidiaries?

A corporation might own a subsidiary company to achieve several benefits.

• Limit liability. Subsidiaries are separate legal entities from the companies that own them. The two companies don’t share legal or financial liability. If a subsidiary company incurs legal fees, for example, the parent company isn’t responsible for those fees.

• Get tax breaks. Multinational corporations may use subsidiaries to benefit from lower tax rates abroad. For example, the U.S. federal corporate tax rate is 21%, while Hungary’s statutory corporate income tax rate is 9%. A U.S. company operating through a Hungarian subsidiary may pay that lower rate on profits earned there. Large multinational groups may also be subject to OECD global minimum tax rules that can raise the effective tax rate, but still remain lower than the home country rate.

• Experiment with new markets. Some businesses create subsidiaries to experiment with new markets. If the experimental subsidiary fails, the parent company isn’t affected. For example, a software company might open a subsidiary that sells computers. If the subsidiary company fails, the software corporation can still operate as before.

• Buy an existing business for diversification. Another route a company can take if it’s looking to expand into a different market is to buy a subsidiary company already operating within that market. Let’s take the software company from our last example. Instead of creating a computer business, the software company could buy a computer company that’s already successful and then share in the profits.‍

How does a subsidiary company work?

As briefly explained, a subsidiary company is owned by a parent company or a holding company. However, there are key differences between the two structures.

• Holding companies don’t typically sell services or make products
• Parent companies conduct their own business and sell products or services
• Holding companies hold investments in a single subsidiary or group of subsidiaries (then, they’re referred to as umbrella corporations)
• A parent company buys or creates a subsidiary to expand its business
• Holding companies choose the board of directors across their subsidiaries
• A parent company can assign the subsidiary’s board members who work for the parent company, or elect a board of directors from across its subsidiaries

What is a parent company?

If a company has a majority of shares in a subsidiary and provides services and products to consumers, that business is a parent company. 

Parent companies are typically large corporations with business operations that buy the controlling interest in a subsidiary or create one themselves.

A parent company might buy a business that offers a certain product or service to broaden its market. However, as a subsidiary, the acquired company remains separate from the parent company.

What is a holding company?

The main function of a holding company is to hold assets. Holding companies generally don’t provide their own services or products. 

Instead, this type of company might own and oversee a selection of subsidiary companies. The holding company may also own other assets, such as real estate or trademarks.

The holding company usually chooses board members from its subsidiary companies.

Accounting for a subsidiary company

Because a subsidiary is a legally distinct business entity (even when fully owned), its finances must be managed separately from the parent company. This ensures legal compliance, clear audit trails, and accurate tax reporting.

Here are key steps companies should follow when managing subsidiary accounting:

• Keep separate financial records. A subsidiary must maintain its own balance sheet, income statement, and cash flow statement. This separation helps protect the parent company from liability and simplifies financial tracking.
• Open independent bank accounts. Each subsidiary should operate its own accounts to avoid commingling funds. This is a legal requirement in most jurisdictions and helps maintain financial clarity.
• Assign a unique Employer Identification Number (EIN). A subsidiary needs its own EIN from the IRS to file taxes, process payroll, and open financial accounts.
• Document all intercompany transactions. Record any payments, loans, shared services, or internal transfers between the parent and subsidiary. These must be reported accurately for tax and compliance purposes.
• Prepare for consolidated tax reporting. If the parent company owns at least 80% of a subsidiary’s stock and voting power, it can file a consolidated U.S. tax return. This allows the parent to offset profits and losses across entities, potentially lowering overall tax liability.
• Rely on specialized accounting support. Managing multiple sets of books — especially across jurisdictions or currencies — can become complex. Many companies hire experienced accountants or independent financial professionals to oversee compliance and reporting.

If you're forming or acquiring a subsidiary, consider working with an accounting expert to structure your financial systems correctly from the start. This proactive step can help you avoid costly mistakes and ensure your business stays compliant.

Top pros and cons of subsidiary companies

Having a subsidiary company comes with both benefits and drawbacks.

Pros include:

• Loss management. A subsidiary is responsible for its own losses. If a subsidiary goes bankrupt, for example, creditors can’t go after its parent company to collect the subsidiary’s debt.

• Decreased liability. Subsidiaries shield their parent companies from lawsuits and financial liability. If a subsidiary gets sued, the parent company isn’t responsible for things like legal expenses and financial payouts.

• Tax advantages. Parent companies often receive favorable tax treatment on dividends from their subsidiaries, in many cases paying little to no tax on those earnings.  Companies with multiple subsidiaries can also offset profits from one of their subsidiaries with losses from another to lower their tax liability.

• Risk reduction. Companies that own subsidiaries limit their risk of bankruptcy. If one of their subsidiaries goes bankrupt, the parent company and the rest of their subsidiaries are typically unaffected.
• Increased efficiency. Splitting up different parts of a company into separate businesses may make each subsidiary easier to manage. Each company has its own management team, often driving greater focus.  

• Easy to acquire and sell. If a parent company wants to expand or diversify its business by offering a new product or service, it can acquire a subsidiary that already performs that service. If the subsidiary fails, the parent company can sell it without affecting its other properties.

• Synergy with other corporate subsidiaries. The subsidiary structure lets parent companies benefit from owning separate companies. However, subsidiaries can still work and interact with other companies under the same umbrella company.

Cons include:

• Legal costs. Setting up a subsidiary can be expensive. When a parent company opens a subsidiary, it has to pay up-front fees to file articles of incorporation and complete other setup tasks. The parent company may have to provide capital funds for the business. If the parent buys the subsidiary, it also has to buy the shares in the business.

• Greater bureaucracy. Parent companies heavily influence the operations of their subsidiaries. The parent company typically forms a board to manage all of its subsidiaries. The board then makes decisions that influence every subsidiary a parent company owns. This addition to the chain of command can slow down the decision-making process.

• Complex financial statements: Tax consolidation can be complex. Combining tax records from several companies into a parent company’s tax statements is a time-consuming task with a significant amount of paperwork. The process will likely require the expertise of a dedicated tax professional or firm.

• Less control. Even though a parent company sets up a board to make decisions for its subsidiaries, the parent may not have complete control over them. Unless the subsidiary is wholly owned, other corporations or investors can also own a portion of it and influence operations.  

Setting up a subsidiary company

Parent companies can form subsidiaries either by acquiring an existing business or by creating a new one. 

The steps involved depend on the approach.

• Acquire an existing business. The parent company purchases a majority of the target company’s stock shares, giving it controlling ownership.
• Create a new subsidiary. The parent must follow local business registration requirements, which may include filing incorporation documents, paying registration fees, and meeting capital or compliance rules.
• Establish governance. After incorporation or acquisition, the parent company forms a board of directors to oversee the subsidiary. Directors are often chosen from leadership within the parent company or from other subsidiaries.
• Maintain separate legal status. A subsidiary is legally distinct from its parent. It has its own business operations, financial records, and obligations, even though the parent consolidates the subsidiary’s results into its own financial statements.
• Document intercompany transactions. Any financial activity between the parent and subsidiary — such as loans, service agreements, or asset transfers — must be recorded for accounting and compliance purposes.

10 examples of subsidiary companies

Consider these 10 examples of parent companies and their subsidiaries.

1. Meta Platforms Inc. (formerly Facebook Inc.) is the parent company that owns Facebook and other companies, including Meta Quest and Instagram.
2. Alphabet Inc. is a holding company that was created to manage Google. Google, in turn, has purchased its own subsidiaries. YouTube is one of Google’s most famous acquisitions. A business framework in which subsidiaries own other subsidiaries is called a tiered subsidiary structure.
3. Amazon.com Inc. owns Whole Foods Market, Audible, Twitch Interactive, Ring, and Zappos.
   
   
4. The Walt Disney Company owns Pixar, Marvel Studios, Lucasfilm, 20th Century Studios, and Hulu.
   
   
5. Microsoft Corporation owns LinkedIn, GitHub, Skype, Activision Blizzard, and Xbox Game Studios.
   
   
6. Berkshire Hathaway Inc. owns a portfolio of subsidiaries, including GEICO, Dairy Queen, Duracell, and BNSF Railway.
   
   
7. PepsiCo Inc. owns beverage and snack subsidiaries, including Frito-Lay, as well as its sister companies such as Gatorade and Quaker Oats.
   
   
8. Unilever PLC owns consumer brands like Dove, Ben & Jerry’s, Hellmann’s (or Best Foods), and Vaseline.
   
   
9. Procter & Gamble (P&G) owns household brands such as Gillette, Tide, Crest, and Pampers.
   
   
10. Sony Group Corporation owns Sony Music Entertainment, Sony Pictures, and PlayStation Studios.

Work with Upwork accounting experts for your corporate structure

Even though parent organizations own them, subsidiaries are legally separate businesses that file their own taxes, including paying income tax for any revenue generated, and maintain their own financial books. 

The subsidiary business structure is a useful tool to help corporations expand their business operations while limiting their liability.

If you’re planning to open or acquire a subsidiary for your business, you may want to hire independent professionals, like accounting specialists, to help you track transactions and manage your legal risks.

FAQs about subsidiaries

Now, we’ll go over a few common questions related to subsidiary companies.

Are subsidiaries owned by parent companies?

Yes, subsidiaries — sometimes referred to as child companies — are owned by parent companies or holding companies. Parent companies generally have their own business operations apart from their subsidiaries. 

Holding companies generally don’t have their own business operations, create products, or provide services.

Do subsidiaries need to be registered?

Yes, just like any other business, a subsidiary needs to be registered in the state or country where it’s located. If the parent company purchases stock in an existing company, the subsidiary is already registered.

Is a franchise considered a subsidiary?

No, a franchise is different from a subsidiary. A subsidiary is a legally independent company owned by a parent or holding company. 

A franchise is a privately owned business that contracts with a franchisor to sell the corporation’s services or products and use its intellectual property (e.g., trademarks, copyrights).

For example, let’s consider a national pizza restaurant chain. The franchise owner signs a contract and agrees to pay the corporation a share of the restaurant’s profits in exchange for the right to sell the corporation’s signature pizza products and use its branding.