Subsidiary is a firm that is controlled by someone else firm through a parent child relationship. A firm is only said to be a subsidiary firm if the parent has controlling interest by owning over 50% of the issued share capital. A Subsidiary on its own may have subsidiaries. Subsidiaries are carefully cut off legal entities for taxation and regulation purpose.
Types of Subsidiaries - Three types of Subsidiaries can be formed namely:
Letterhead
-Public microscopic Liability
-Minimum Capital - Must be paid by the founders (minimum two members)
-Shares - Can issue nominative or bearer shares
-Management - Should have at least three directors. One director should be a permanent resident of the country
-Private microscopic Liability
-Minimum Capital - Must be paid by the founders
-Shares - Shares need to be nominative. Bearer shares cannot be subscribed
-Management - Managed by one or more managers
-Co-operative firm with microscopic liability
-Minimum Capital - Three partners are needed. One quarter of capital gift must be paid-in
-Shares - Shares are nominative
-Management - A co-operative firm with microscopic liability and managed by one or more managers
Parent firm - Subsidiary Relation
It is prominent that the subsidiary is recognized as an independent corporation managed by the board of directors even though it was incorporated by the parent company. This does not mean that the subsidiary is uncontrolled. The parent firm has the legal authority to hold the subsidiary accountable to meet the financial objectives.
For the Parent firm to control the independent subsidiary it should be:
-The sole shareholder
-Include voting control provisions in subsidiary article
-Prepare bylaws defining the authority of the officers, their term in the office and removal
-Prohibit bylaws amendment without shareholder's approval
Legal Risks
As long as the parent firm holds its subsidiary accountable for the expectations of its board of directors there is microscopic risk for the parent to be found liable for the wrong doings of the subsidiary. But, if the parent firm exercises inordinate control for example has the same board of directors, use of base letterhead, in such case the parent firm and the subsidiary are treated as one and the parent firm is responsible for the subsidiaries debts etc.
Advantages and Disadvantages of Subsidiary
Advantages
-Considerable tax advantages and legal protections
-Ability to offset profits and losses of one part of a firm with another
-Some countries allow subsidiaries to file tax returns on the profits obtained in that country
-Liabilities and reputation claims are locked in that subsidiary and cannot be passed on to the parent company
-Allows for joint ventures with other associates with each owning a quantum of the new firm operation
Disadvantages
-Legal paperwork complicated with creating a subsidiary can be lengthy and expensive
-Control also becomes an issue when a subsidiary is partially owned by someone else outside organization
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