A subsidiary is a company that is owned or controlled by another company, referred to as the parent or parent company or sometimes the holding company. The subsidiary can take on a variety of legal forms such as company, joint venture, limited liability company or PLC and can even be a national or state-owned enterprise. The parent company may be the sole owner or one of several owners involved in a joint venture. If the parent company is the sole owner, the firm may be referred to as a “wholly-owned subsidiary“. In addition, subsidiaries may also have their own sub-companies creating a long chain of ownership.
Subsidiaries are an extremely common feature in the course of business. Most large, especially international firms will operate a subsidiary in some capacity. A well cited example is the holding company Berkshire Hathaway run by famed investor Warren Buffett which has no operations of its own. That is, it owns a controlling stake of other companies (the subsidiaries). On the other hand, technology companies who operate in a rapidly changing industry are well known to participate in numerous mergers and acquisitions and therefore control a number of subsidiaries at any one time as part of an overall business.
A subsidiary operates as a separate and distinct corporation from its parent company. The organizing of these businesses can be done along national lines as the firms need not operate in the same location, or separated by product or function. This formation can lead to benefits such as preferential taxation and regulation although their creation and management may be more complex. Legal liability however, can move up and down the chain. Generally speaking, only if it’s a totally separate company will the liability stay separate.
Subsidiary Example
As previously mentioned, Warren Buffett’s Berkshire Hathaway is a holding company with a long and diverse list of subsidiary companies. Some of the more well known household names on the list are Dairy Queen, Business Wire, and GEICO. Berkshire Hathaway’s acquisition strategy is to buy outright, or significantly invest in undervalued assets and hold them for a period of time. These subsidiaries often continue operating independently but also gain access to broader financial resources controlled by the parent. For the year ended December 31, 2018 the firm reported almost 300 subsidiaries.
In the technology space the popular instant messaging service WhatsApp, is also a subsidiary. Facebook acquired this well known app for approximately $19.3bn in 2014.
