Jessica Donohue

Senior Specialist

What is a subsidiary company? Definition, examples and FAQs

Leading international companies have created a collective of 370,000 subsidiaries, many of which operate in the U.S. Before you follow in their footsteps, you must understand not only what a subsidiary company is but also how to manage one effectively.

A subsidiary company is owned or controlled by a parent or holding company. Usually, the parent company will own more than 50% of the subsidiary company. This gives the parent organization the controlling share of the subsidiary. Sometimes, control is achieved simply by being the majority shareholder. When a parent organization owns all common stock of a company, it is known as a ‘wholly owned' subsidiary.

This guide will explain:

• What a subsidiary company is
• The difference between subsidiaries and other entities
• How a subsidiary company works
• Examples of subsidiary companies
• How entity management software can aid with corporation management

What is a subsidiary company?

Subsidiary definition: a company that is at least 50% owned by a parent or holding company.

A subsidiary company is either partially or wholly owned by another company. That company can be either a parent company, which is its own functioning company, or a holding company, which solely controls other companies and investments.

To be a subsidiary, a company has to be at least 50% owned by the parent or holding company. Subsidiaries 100% owned are considered wholly owned subsidiaries.

Characteristics of a subsidiary

Subsidiaries are crucial in how multinational corporations structure their operations, manage risk and expand into new markets. While owned or controlled by a parent company, subsidiaries maintain some independence. Understanding the core characteristics of a subsidiary helps clarify precisely what a subsidiary is, how it functions and why it’s strategically crucial for businesses.

1. Separate legal entity: A subsidiary is legally distinct from its parent company, even if wholly owned. This structure allows it to enter into contracts, own assets and be sued independently.
2. Independent financial statements: Subsidiaries typically maintain their own balance sheets and income statements, though their financials may be consolidated into their parent company’s reports.
3. Own management team and branding: Most subsidiaries have their own leadership and may operate under a different name or brand, primarily when serving distinct markets or customer segments.
4. Levels of ownership: Depending on the business strategy and investment structure, a parent company may own 100% of a subsidiary (wholly owned) or a controlling stake (usually over 50%).
5. Liability and risk isolation: One key benefit of forming subsidiaries is risk management; liabilities incurred by the subsidiary generally do not transfer to the parent company.

The difference between subsidiaries and other entities

Distinguishing between a subsidiary and other business relationships is key to navigating corporate structures. Below are comparisons between subsidiaries and commonly confused entities:

Subsidiary versus sister company

A parent company controls a subsidiary, while a sister company is another entity owned by the same parent. The key distinction is that sister companies are peers — not in a controlling relationship with each other — though they may collaborate or share resources.

Subsidiary versus affiliate

An affiliate is a company where another firm holds a minority interest, typically less than 50%. In contrast, a subsidiary involves majority or full ownership, giving the parent company significant or total control over decisions and operations.

Subsidiary versus division

A division is an internal segment of a company, not a separate legal entity. It operates under the parent company’s name and legal identity. On the other hand, a subsidiary is a standalone legal entity, even if wholly owned, and often has its own branding, financials and liability.

How a subsidiary company works

A subsidiary and a parent company are legally separate entities. This means that individual organizations pay taxes and debt, limiting shared liabilities between the companies. Subsidiary companies will have independence from the parent company and, in many cases, are individual brands. However, the parent company will naturally influence the subsidiary’s operations, including governance. The parent company can elect the board of directors as the major shareholder and drive the overall business strategy.

Subsidiaries are a commonly used structure for both national and international corporations. Tiers of subsidiaries group a range of industries within a multinational conglomerate. The structure can also bring together companies from within one sector in a corporate group.

How does a parent company control its subsidiary?

A parent company controls its subsidiary by owning all or most of its stock. If that’s the case, the parent company can control most subsidiary operations, including assigning the board members.

The parent company can also include clauses in the subsidiary’s Articles of Incorporation to assign certain powers, such as requiring the parent company’s approval to pass bylaw changes or take certain actions.

That said, parent companies reap the benefits of subsidiaries when the subsidiary can operate more independently. This allows the subsidiary to set its own corporate strategy and objectives, which often significantly differ from those of the parent company.

Can a subsidiary be liable for a parent company?

Typically, a subsidiary cannot be liable for a parent company. Because they’re legally separate entities, they retain their own liability, meaning the parent company usually isn’t liable for the subsidiary’s actions either.

Can a subsidiary leave a parent company?

A subsidiary can leave a parent company, but the structure of the subsidiary/parent company relationship makes this uncommon. To leave the parent company, the subsidiary’s shareholders and board of directors would have to approve it. However, the parent company is among the shareholders — and, sometimes, the only shareholder — so it’s unlikely that a vote to leave the parent company would pass.

Can a subsidiary sue a parent company?

A subsidiary can sue a parent company, but it’s exceedingly rare and depends on the subsidiary’s Articles of Incorporation. To sue, the subsidiary has to prove damages due to the parent company — a difficult thing to do because the parent company owns the subsidiary. However, it’s still possible to sue if the parent company’s actions directly interfered with the subsidiary’s contractual obligations and the subsidiary suffered damages as a result.

Who owns a subsidiary company?

Subsidiary companies will be owned by either a parent company or a holding corporation. A wholly-owned subsidiary company will be entirely owned by the parent or holding corporation. In other cases, parent companies will have the controlling share of a subsidiary company. In practice, this means owning more than half of a company’s common stock. So, by definition, parent companies have majority ownership or control of a subsidiary.

As the major shareholder, parent companies will have the deciding vote when electing the directors in the boardroom. In many cases, a member sits on the board of both the parent and subsidiary companies. Because of this, parent companies will significantly influence the strategic direction of subsidiaries, including any steering committee groups.

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Types of subsidiary companies

There are two types of subsidiary companies: wholly owned and partially owned. The primary difference lies in the parent or holding company's ownership stake.

Wholly-owned subsidiary: A wholly-owned subsidiary is 100% owned by the parent corporation. The parent company holds all common stock, which means they have sole influence over the subsidiary’s operations. This is generally achieved through a parent company acquiring full control of a company or by founding the subsidiary company itself. The wholly-owned subsidiary company is still legally recognized as its own entity.

Normal/partially-owned subsidiary: A normal subsidiary is when a parent or holding corporation owns more than half of the common stock. This means the subsidiary will have multiple shareholders who can influence the corporation’s ongoing operations.

What is the purpose of a subsidiary company?

The main benefit of subsidiary companies is that they are different legal entities from their parent company. This means the two companies can limit shared liabilities or obligations and will be separate in terms of regulation or tax. This legally recognized separation is a key difference between a branch and a subsidiary company.

Some other common reasons parent companies also use subsidiaries for the following purposes:

• Legal and financial liability: In practice, having two distinct legal entities limits the liability of both the parent and subsidiary companies. Keeping companies separate can help to insulate the holding company from potential financial or legal issues faced by a subsidiary company.
• Regulatory compliance: In the case of multinational corporations, subsidiary companies will align themselves with local regulations or laws
• Expand in new markets: Subsidiary companies are a common way for corporations to expand into international markets. As independent entities, the risk for the wider corporation is minimized.
• Utilize more flexible operations: Subsidiary companies are often distinct brands positioned under an overall holding company. These brands can benefit from the synergy between different parts of the larger corporate group but also retain the benefit of independence. Subsidiaries can be experimental brands or products, as financial liabilities are contained. As separate legal entities, subsidiary companies are more straightforward to manage or sell to.
• Leverage diverse expertise: Instead of investing heavily in internal research and development, parent companies often acquire companies with specific area expertise. An example would be a larger company purchasing a small firm that produces a specific technology or digital tool. Subsidiary companies allow parent corporations to diversify their business but isolate the potential risks.
• Tax advantages: Subsidiaries have the potential for favorable tax rates due to their separate setting from the parent company. As an incorporated company in its own right, a subsidiary company can take advantage of more favorable corporate tax rates compared to where the parent company is based. This is a key part of good governance between parent companies and subsidiaries.
• Limited liability: Allows limited financial liability for the wider holding corporation, containing potential losses within the subsidiary company.
• Greater independence for brands: Keep a specific brand or product as its own legal entity to maintain independence and make selling straightforward.
• Develop niches: Subsidiaries focusing on specific products or technology development can strengthen the corporation as a whole.

Pros and cons of a subsidiary company

A subsidiary company may sound like a win-win. While it’s true that they shelter the parent from liabilities, offer tax benefits and facilitate growth, they also greatly complicate the corporate structure. Corporations considering a subsidiary should consider both the pros and cons of a subsidiary structure before moving forward.

Examples of parent and subsidiary companies

Many modern businesses have subsidiaries; some offer liability protection, while others allow the parent company to reach new industries or territories. For example, PepsiCo isn’t just a company; it’s a conglomerate that owns more than one subsidiary company, including Mountain Dew, Frito-Lay and even Quaker Foods.

More common examples of subsidiary companies include:

How to find the subsidiaries of a company

The Securities and Exchange Commission (SEC) requires publicly listed companies to disclose their subsidiaries, including when they acquire or dispose of a subsidiary. As a result, this information is publicly available, and you can find the subsidiaries of a company if you know where to look.

A company’s subsidiaries are usually listed on:

1. The company website: Annual reports are a hotspot for lists of subsidiaries. You can also check press releases, as a company will likely mention subsidiary updates there.
2. The SEC website: You can search and download documents from the EDGAR database, including registration statements and other forms. These forms usually include subsidiary information.

How to create a subsidiary company

A parent company can either create a subsidiary company or purchase the majority shares in an existing company. If founding a new subsidiary, parent companies will need to:

1. Authorize the subsidiary: The parent company’s board of directors will vote to form the subsidiary company. This should include a resolution about the agreement signed by the board chair.
2. Determine the structure: A subsidiary company can follow a corporate or LLC structure since both limit liability. Both are taxed differently, so the parent company should choose a structure that benefits its finances.
3. Complete the process of incorporation: As with the creation of any new company, the parent company needs to register the subsidiary within the state or country where it intends to establish it. The parent company will be recorded as the owner of the subsidiary during the incorporation process.
4. Fund the subsidiary: Like any new business, subsidiaries need capital. A parent company can transfer assets to the subsidiary, making the parent company the owner.
5. Define operations: Parent companies need to organize how the subsidiary company will operate. This includes everything from appointing the board of directors to establishing a governance framework to deciding how the subsidiary will make critical decisions.
6. Elect a board of directors: As the majority owners, a parent corporation will elect the subsidiary’s board of directors, including the chairman of the board. In many cases, certain members will sit on the board of both the parent and subsidiary companies. They can help to represent the wider group’s interests when making strategic decisions.
7. Produce ongoing documentation: As a legally separate entity, subsidiaries function as normal independent companies. They will produce their own independent financial statements. Parent companies must record all transactions between themselves and the subsidiary. Parent companies are also required to include financial statements from their subsidiary companies within a consolidated financial document. Corporate documentation is vital across the whole business life cycle, from initial incorporation until the potential closure of a subsidiary.
8. Automate subsidiary management: Creating a subsidiary is just the start. Managing a subsidiary requires orchestrating complex data and documents and integrating them seamlessly with the parent company’s reporting. Tools like Diligent Entities AI enable AI-powered updates to subsidiary records, immediately spot gaps in subsidiary data and generate custom organizational charts that visualize subsidiary structures. Integrating AI into your subsidiary management reduces manual workloads, lowers the risk of noncompliance and gives leadership a real-time view across all subsidiaries — all of which future-proofs corporate governance.

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Regulatory and accounting implications of forming a subsidiary

Establishing a subsidiary involves setting up a new business entity, but it also brings a host of regulatory and accounting responsibilities. Companies must navigate financial reporting standards, jurisdiction-specific compliance rules and tax and audit requirements that vary by region. Understanding these implications helps ensure that legal or operational risks do not outweigh the benefits of a subsidiary structure.

1. Consolidated financial reporting: Parent companies are typically required to consolidate the financial results of their subsidiaries into a single set of financial statements. This ensures stakeholders have a full view of the company’s financial position and performance, but it also adds complexity to accounting and reporting processes.

2. Compliance requirements: Subsidiaries must adhere to local and international regulations, depending on their location and industry. The layered compliance landscape they face requires strong governance and legal oversight. For example:

• In the U.S., they may be subject to SEC and IRS filings.
• In the UK, they must register and report to Companies House.
• Globally, subsidiaries may face anti-money laundering (AML), GDPR or industry-specific compliance standards.

3. Impacts on audits and tax filings: Each subsidiary may be subject to its own audit requirements and tax obligations based on jurisdictional rules. While some audits are conducted independently at the subsidiary level, others are rolled up into the parent company’s global audit. Tax implications can be especially complex when dealing with transfer pricing, foreign income taxes or intercompany transactions.

How AI and digital tools are transforming subsidiary management

Managing subsidiaries across multiple regions, regulations and functions used to be labor-intensive. However, modern digital tools are transforming subsidiary governance entirely. Tools like Diligent Entities AI drive greater efficiency, compliance and insight through AI-powered automation and centralized, real-time data.

“Making sure that we’re in compliance everywhere we do business would be unmanageable without a tool like Diligent Entities," Noureldin says. "It’s really a one-stop shop for the organization. It makes it easy to capture all the information that everyone is plugging into day after day,” said Liane Noureldin, Senior Corporate Paralegal at Fortive, an industrial conglomerate with over 300 entities.

Intelligent compliance monitoring

Tools like Diligent Entities track jurisdiction-specific filing deadlines and automatically trigger reminders, workflows and even e-filing capabilities. This keeps subsidiaries compliant with requirements such as SEC or Companies House filings, data privacy rules or foreign ownership disclosures.

Centralized entity management with a single source of truth

Diligent Entities AI acts as a master repository for all entity-level data, including legal structure, ownership, officers, UBOs and documents, across hundreds of subsidiaries. It helps eliminate duplication, reduce risk from inconsistent data and accelerate mergers and acquisitions or restructuring.

“They get really excited to know they don’t need to email someone or chase someone down. It’s there, and it’s accessible. People are usually impressed we house the information for 300+ legal entities in one system,” says Noureldin.

Workflow automation and lifecycle management

With features like entity lifecycle management, Diligent automates approval flows, change requests and audit trails for entity actions like name changes, registration updates and dissolutions. All activity is tracked in a controlled, timestamped audit trail.

AI-enhanced organizational charting and reporting

Dynamic, AI-powered org chart tools allow teams to generate interactive group structure visuals easily, highlight ownership paths and model what-if scenarios. These charts update in real-time and can be easily tailored to different audiences, giving leadership immediate insight into the entity data that matters most.

Risk and data integrity

Diligent Entities AI integrates with third-party sources to validate entity registration data against public records automatically. It also surfaces personnel risk by screening executive-level individuals against sanctions or adverse media databases, helping organizations stay audit-ready and mitigate reputation exposure.

“Everyone is always confident that what’s in Diligent is up to date and correct,” says Noureldin. “If they need a specific report, they know that they can get it from Entities.”

Effectively create and manage your subsidiaries with Diligent Entities AI

Managing the boardroom and operations of one subsidiary company can be complex, let alone multiple subsidiaries. Simplify the process with AI-powered entity management software. With the right solution, you can improve your efficiency, streamline your business intelligence and ultimately create a centralized corporate record to help you make more strategic decisions about your subsidiaries.

Diligent Entities AI:

• Rapidly imports and updates subsidiary and entity records
• Spots gaps in subsidiary data, keeps records current and ensures ownership information is accurate and up to date
• Generates AI-powered, custom org charts so stakeholders and leaders can model different scenarios
• Provides a built-in AI virtual assistant so you can easily find key information in subsidiary and corporate records
• Summarizes documents using AI to pull salient insights quickly

“By partnering with Diligent Entities, you really do have a friend at work,” says Noureldin. “It’s really been crucial in my success.”

Find out how Diligent Entities AI can help your corporation. Request a demo from the team today.

Frequently asked questions (FAQs)

Is a subsidiary an LLC or a corporation?

A subsidiary company can be either an LLC or a corporation. The parent company will decide which structure the subsidiary will take. This is usually a financial and legal decision. While both LLCs and corporations limit liability, they are taxed differently.

Are subsidiaries 100% owned?

Subsidiaries can be both wholly-owned (100% owned) or not-wholly-owned. A parent company only needs to own more than 50% of another company’s stock for that company to be considered a subsidiary.

Is a subsidiary its own company?

Yes. Subsidiaries typically operate on their own and follow their own structure, but they benefit from the resources and connection to their parent company.

What are tiered subsidiaries?

There can be multiple layers or tiers of subsidiary companies within a wider corporate group. A company owned by a parent corporation is a first-tier subsidiary. But this subsidiary company may hold majority shares of a subsidiary company of its own. The second subsidiary company can be described as a second-tier subsidiary of the overall parent corporation. The tiers can continue depending on the complexity of the corporate group.

The parent company will have a degree of control over both tiers of subsidiary companies. As the major shareholder, it will hold direct control of a first-tier subsidiary. It can elect the board of directors and influence strategic business decisions when required. Using this influence, the parent company can exercise indirect control of the second-tier subsidiary.

What is a wholly-owned subsidiary company?

If the entire subsidiary company is owned by the parent corporation, this is known as a wholly owned subsidiary. A wholly-owned subsidiary company has no other shareholders. This gives the parent corporation a major influence on the company’s ongoing operations. Direct control of who sits on the board of directors helps define the aims and strategic decisions made by the subsidiary company.

What is an associate company?

When a corporation owns a minor share of another business, the company is known as an associate or affiliated company. In this case, a corporation owns a portion of a company but not enough to have full ownership. Usually, this is when a parent corporation owns less than half of a company's common shares. To be considered a subsidiary, the parent corporation would need to own the majority of the company.

With a minority share of common stock, a parent corporation will have no direct control over strategic decisions. In most cases, a larger company will invest in a smaller associate company. The parent company will usually record the value of this investment on its financial statements.

What are sister companies?

Sister companies are subsidiary companies that share a parent or holding company. Most sister companies operate independently and have no relationship other than the owning corporation.

Does a subsidiary have its own CEO?

Subsidiaries do have their own CEO, management team and board of directors. However, the parent company does have sway over who holds those positions.

Can a subsidiary own shares in its parent company?

In most cases, no subsidiary can own shares in its parent company. This is known as a circular ownership structure, and it's typically prohibited by corporate law in many jurisdictions. The logic is that control must flow in one direction: from parent to subsidiary. If a subsidiary were to own shares in its parent, it could distort voting rights and financial reporting. In rare cases — such as cross-holdings in joint ventures — exceptions may apply, but these are strictly regulated.

Is a subsidiary liable for parent company debts?

Generally, a subsidiary is not liable for the debts of its parent company. One of the key legal benefits of forming a subsidiary is liability protection. Because a subsidiary is a separate legal entity, creditors of the parent company cannot pursue the subsidiary’s assets — unless there is fraud, co-mingling of assets or a legal basis to "pierce the corporate veil." However, shared branding or intercompany guarantees can blur these lines, so legal structuring matters.

What are the tax implications of a subsidiary?

Subsidiaries are taxed separately from their parent companies and must comply with the tax laws of the country or state in which they are incorporated. This means they file their own tax returns and may be subject to different corporate tax rates, withholding taxes, and transfer pricing rules. For multinational companies, this creates both tax planning opportunities and compliance challenges, especially around intercompany transactions and profit shifting.

Key considerations include:

• Double taxation treaties
• Transfer pricing documentation
• Withholding taxes on dividends
• Eligibility for local tax incentives or credits

How do I close a subsidiary?

Closing a subsidiary involves a formal legal process, which can vary by jurisdiction. The typical steps include:

1. Board and shareholder approval
2. Settling debts and obligations
3. Filing dissolution paperwork with the relevant government agency (e.g., Companies House in the UK or the Secretary of State in the U.S.)
4. Cancelling registrations, licenses, and tax IDs
5. Distributing remaining assets to the parent company

Keep in mind that closing a subsidiary may trigger final tax filings, employee notifications and regulatory reporting. It’s wise to consult legal and tax advisors to ensure a clean exit.