Many of the companies you interact with every day either own, or are, subsidiaries of another company. For example, Alphabet Inc. is the parent company, and Google is a subsidiary. This post will give you a high level overview of corporate subsidiaries.
What is a corporate subsidiary?
A subsidiary is a business or corporation that is entirely, or majority owned by another business or corporation. Most of the time, the subsidiary runs a product, or group of products, that provide compelentary service the parent company.
Why do companies create subsidiaries?
There are a variety of reasons why companies create subsidiaries. Some of the most common are separating brand identities, separating liabilities, or reaping the tax benefits of offseting profits from one part of the business with the losses in another (this is NOT accounting advice – speak to your CPA about this).
How do I create a corporate subsidiary?
First, the company leadership, counsel, and accountants should decide whether a subsidiary is even necessary. Adding subsidiaries adds organizational complexity and costs related to formation and counsel of the company.
Second, the company must decide the best type of entity for the subsidiary – corporation, limited liability company, or partnership. Each of these entities have their own unique advantages.
Third, the company should choose the jurisdiction of organization. Delaware is popular and commonly chosen because of low franchise taxes, ease of filing and online services, and a well developed body of corporate law.
Fourth, the parent company must come to a corporate resolution and a decision to form a subsidiary, record this in meeting minutes, and vote on a resolution to create the subsidiary with other board members and shareholders.
Finally, the parent company can employ their attorneys to create the Certificate of Incorporation to file with the state of registration, Corporate Bylaws, and all organizational resolutions and post-formation tasks to create the company.
These tasks include, but are certainly not limited to:
- Adoption of corporate by-laws
- Appointment of initial officers
- Adoption and issuance of a stock plan and stock certificates, along with execution of these documents,
- Assignment of intellectual property from employees, consultants, and parent company to Subsidiary,
- Capitalizing the Subsidiary.
How do I maintain a corporate subsidiary?
Corporate governance applies to subsidiaries the same way they apply to the parent company. (For a high level overview of corporate governance – click here). This includes:
- Keeping the company in good standing by filing necessary reports and paying franchise taxes.
- Paying income, employment, and all other taxes.
- Maintaining foreign qualifications to operate in other states
- Holding annual stockholder meetings.
- Voting on board resolutions.
- Keeping minutes.
- You must run meetings when making decisions, keep your company in good standing with the state of registration, pay your franchise taxes and file required reports,
- Running the subsidiary as a separate company altogether – to maintain liability protection.
Let us Help.
This is a high level overview of what a corporate subsidiary is, and how to create one. If you’re considering creating a subsidiary for your company, speak to experienced counsel and your accountant.
Kader Law can help you understand what you need to do, guide you to appropriate channels, and simplify the maze of corporate subsidiary creation through our Outside General Counsel offering. If you’re interested in connecting, feel free to contact us.
This post is not legal advice, and does not establish any attorney client privilege between Law Office of K.S. Kader, PLLC and you, the reader.