What is a Subsidiary? – 2022 – Robinhood

How does a subsidiary work?

To set up a subsidiary, the parent company has to own more than half of the shares of the subsidiary. An essential feature of a subsidiary is that its parent company has control over its operations.

If ownership is less than half in a company, then that company is not considered a subsidiary and is referred to as an associate or affiliate company. This is an important distinction because the financial reporting rules for a subsidiary company differ from those of an associate company.

A best practice is to seek the advice of a certified public accountant (CPA) with experience in transfers of assets and liabilities between companies and knowledge of both the federal tax code and state tax code of the states applicable to the parent company and subsidiary company.

The assets and liabilities of the parent company are typically separate from those of the subsidiary, protecting from liability and creditor claims. This means, among other things, that creditors of the subsidiary usually cannot go after the assets of the parent company if the subsidiary were to default on a loan.