As businesses grow, it is not uncommon for them to establish and control several subsidiary companies. Establishing subsidiary companies can be of great benefit to a parent company, as they offer the opportunity to expand the business with minimal risks. Subsidiaries can be formed in different ways and for various reasons. A corporation can form a subsidiary either by purchasing a controlling interest in an existing company or by establishing the company itself.
One of the most important benefits of having a subsidiary company is that, in general, liabilities and credit claims are locked in that subsidiary and cannot be passed on to the parent company. This is because, although a parent company may control a subsidiary, the subsidiary and the parent company are considered separate legal entities. A company would choose to establish a subsidiary if it prefers not to expose its assets to the liabilities associated with the new enterprise. If the subsidiary company runs into financial trouble, the parent company’s assets and its credit rating may be legally protected.
While subsidiaries and their parents are considered separate legal entities for liability purposes, they can be considered a single economic entity for the purpose of filing financial statements. In choosing to establish a subsidiary, a parent corporation can, therefore, gain valuable tax benefits. Adopting a subsidiary structure gives the parent company the ability, on federal income tax returns, to offset profits in one part of the business with the losses in another.
If your business is considering establishing a subsidiary company, you should contact a corporate attorney who can help you navigate the legal and tax issues involved.