What Is a Subsidiary Company and How Does It Work?

Foreign company subsidiary

Meaning of Subsidiary:

When a company buys another company, the second company usually becomes a subsidiary.
 or 
An enterprise controlled by another (called the parent) through the ownership of greater than 50 percent of its voting stock. 

What is a Subsidiary Company?
A subsidiary is a business that is wholly or partially owned by another business, sometimes called the parent company or holding company. The parent company owns sufficient voting stock in the subsidiary -- as a rule, at least 50% -- to give it control over the subsidiary's operations and management. In a wholly-owned subsidiary, the parent company owns 100% of the stock.

Parent Company:
A parent company is simply a company that runs a business and that owns another business — the subsidiary. The parent company has operations of its own, and the subsidiary may carry on a related business. For example, the subsidiary might own and manage property assets of the parent company, to keep the liability from those assets separate. 

Types of subsidiary:

There can be two types of it based upon ownership namely

• 100% ownership
  
  • Fully owned subsidiaries (only in FDI permitted sectors as Per latest FDI policy)

• Less than 100% ownership
  
  • Joint Ventures  
  A subsidiary's parent company may be the sole owner or one of several owners. If a parent company or holding company owns 100% of another company, that company is called a "wholly owned subsidiary."

 

Chartered Accountant in Delhi

Why Form a Subsidiary?
This separate legal structure may be used to gain certain tax benefits, track the results of a separate business unit, segregate risk from the rest of the organization, or prepare certain assets for sale. A larger business may own dozens or even hundreds of subsidiary companies.

How a Subsidiary Operates? 

A subsidiary operates as a normal company would, while the parent company has only oversight. If the parent company had day-to-day supervision of the subsidiary, that would mean the parent would take on the liability of the subsidiary.

How a Subsidiary Is Formed?

A subsidiary is formed by registering with the state in which the company operates. The ownership of the subsidiary is spelled out in the registration. 

Let's say Company A wants to form a subsidiary to manage its properties. The subsidiary, Company B, registers with the state and indicates that it is wholly owned by Company A.  

Setting up subsidiary of foreign company in India 

Foreign company subsidiary: 

There are four ways for a foreign business to conduct activities in India, through Subsidiary, Branch Office, Liaison Office or Project Office. Each way is distinct and have unique purpose and RBI rules to qualify for a successful registration. Raaas suggests the Subsidiary way as the best for Companies when they would like to enter India for business.

The process is quite simple, it is always advisable to take help of a Chartered Accountant in India while carrying out any company formation procedures.

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