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We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. What Is a Wholly Owned Subsidiary? Wholly owned subsidiaries allow the parent company to diversify, manage, and possibly reduce its risk. In general, wholly owned subsidiaries retain legal control over operations, products, and processes.
Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Read our privacy policy to learn more. The costs involved can be as little as a few thousand dollars for smaller companies, and when costs are higher, they are almost always nominal compared with potential rewards. Forming a subsidiary also can provide tax benefits at the state level.
Companies must be especially mindful of the rules governing qualified plans, such as pensions or profit-sharing vehicles subject to federal laws. For CPAs whose employers or clients may be growing beyond a single-entity structure, this article explains when it makes sense to take the subsidiary route. Certain routine developments can trigger the need for a subsidiary. Other times, companies need to form subsidiaries to facilitate the potential sale of part of the company.
From an accounting perspective, creating a subsidiary generally makes sense under any of these conditions because it allows companies to enjoy substantial tax benefits and creditor protections. There are costs involved—hiring attorneys to draft and file the necessary legal documents, for example, and paying CPAs to handle marginally more complex tax returns. But those costs may be measured in as little as thousands of dollars for smaller companies, and even when costs are higher, they almost always are nominal compared with potential rewards from legal protections and tax benefits.
The principal tax benefit associated with adopting a subsidiary structure is the ability of a company, on federal income tax returns, to offset profits in one part of the business with losses in another.
Suppose, as an example, John Doe owns J. Frames Corp. Doe decides to buy a struggling manufacturer of automobile wheels, Wild Wheels Inc. The company links the D-U-N-S numbers recognized as a global business identification standard of more than 64 million parent companies, their subsidiaries, headquarters and branches around the world. In the United States suppliers doing business with the federal government via electronic data interchange must submit their D-U-N-S number for registration and transaction processes.
But what if Doe decided to form a holding company—called Doe Industries Inc. Frames and Wild Wheels as its two wholly owned subsidiaries? For federal tax reporting purposes, U.
The net result? To be sure, Doe could simply operate Wild Wheels as an unincorporated division of Doe Industries, in which case any losses by one operation would automatically offset profits in the other—without the complexities of filing a consolidated tax return. However, he would lose some of the legal protections inherent in the subsidiary structure, such as the ability to insulate Doe Industries from the liabilities of Wild Wheels.
If he wished to retain those protections and still avoid the consolidated return, Doe could structure Wild Wheels as a subsidiary but for tax reporting purposes consider it a disregarded entity under IRC section The entire organization may be able to save on its taxes if the parent company owns over 80 percent of one or more subsidiaries. The parent can file a consolidated tax return and use a losses from a failing subsidiary to offset income from other subsidiaries.
Keeping each company separate allows the parent company to sell unprofitable subsidiaries without disrupting its own business activities. Because the assets of each subsidiary are also separate, the reach of creditors is limited to only the subsidiary that signed the contract with that particular creditor. A subsidiary also allows you to offer stock in a portion of the company without affecting the parent company's stock price. For example, startups often hold initial public offerings to raise funds for the company and cash out some of the founders' personal investment.
This is more difficult for an established company that needs capital for a new venture. In this case, it may be better to spin the new venture off into its own subsidiary and take that subsidiary public. The agreement functions predictably and the members can amend it at any time as the needs of the business and its owners change.
Times have changed. LLCs are now the most popular new business type, representing three quarters of new businesses formed. Many of these new LLCs are subsidiaries, and not just for big businesses. Many small businesses also have wholly owned parent-child subsidiaries. First, you need to form a single-member LLC whose single member is the parent company. Subs are popular because they are super easy to administer.
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