Subsidiary

A subsidiary is a company that is controlled by another company, referred to as the parent or holding company. The parent company typically holds more than 50% of the subsidiary’s voting stock, enabling it to influence or direct its operations and decision-making processes.

Detailed Explanation of a Subsidiary

A subsidiary operates as a separate legal entity from its parent company, which means it has its own financial statements, management team, and business operations. However, the parent company consolidates the financial results of the subsidiary into its overall financial reporting.

Key Characteristics of a Subsidiary

• Ownership: The parent company usually owns a majority stake, often defined as over 50% of the voting shares.
• Legal Independence: A subsidiary has its own legal structure, which allows it to operate independently while still being under the control of the parent.
• Financial Reporting: While the subsidiary maintains its own financial records, its results are consolidated into the parent company’s financial statements.
• Strategy Alignment: Subsidiaries may pursue specific business goals that align with the overall strategy of the parent company.

Example of a Subsidiary

An example of a subsidiary is Ford Motor Company’s ownership of Jaguar Land Rover. Ford acquired Jaguar in 1989 and Land Rover in 2000, and at times, it consolidated the financial results of these brands into its overall reports. While Jaguar Land Rover operates with its own management and brands, Ford has significant control over its strategic direction and financial performance.

Calculation of Ownership and Control

To determine whether a company is a subsidiary, the ownership percentage is key. Here is a simple calculation:

Ownership Calculation Example:

1. Determine the total number of voting shares issued by the subsidiary. For instance, if a subsidiary has 1,000,000 shares.
2. Calculate the number of shares owned by the parent company. For instance, if the parent company owns 600,000 shares.
3. Calculate the ownership percentage using the formula:

Ownership Percentage = (Shares Owned by Parent / Total Shares) * 100

Using the example numbers:

Ownership Percentage = (600,000 / 1,000,000) * 100 = 60%

This indicates that the parent company owns 60% of the subsidiary, confirming its status as a subsidiary.

Through this structure, subsidiaries can also provide various tax benefits and business advantages, including risk management by isolating liabilities and potential losses of different business units.