What is a subsidiary company? This question should be answered and you should get the complete details on it when you want to establish such a company. Here are the things that you should be aware of. Get to know more!
A subsidiary is an organization that is legally independent. She can control the release of products, the delivery of goods to consumers, the introduction of new technologies and so on. But at the same time, it has an obligation to pay the entire profit to the parent company. The latter pays for the labour of the workers, receives equipment and tools, and accepts other expenses. Therefore, the subsidiary depends entirely on the budget of the parent company. Turns out the “daughter” is free on everything except the finance page. Today it is not uncommon for a base company to actively intervene in a secondary company: it hires managers from their own staff, directs and regulates sales routes, and oversees production. So, you might have got an idea about what is a subidiary company.
The subsidiary depends entirely on the budget of the parent company.
From 1994, the subsidiary became a business entity created or acquired by another company. It has the right to personally manage production, but at the same time, it is financially dependent. This situation avoids conflicts between the parent company and the company within its jurisdiction. After all, both companies are at the expense of each other. If the subsidiary goes bankrupt, the parent company assumes all responsibility for the issue.
One does not need to make any super effort to open a subsidiary which works for the benefit of the primary at the expense of the latter. What do you need:
- Main company documents;
- Created company;
- The purpose is to create a subsidiary limited liability company that will operate in accordance with all jurisdiction rules.
You must apply on Form P11001. The new queue for posting the paper is here. An important role is played by obtaining a no-debt certificate from your major company.
How to create a daughter?
There are 2 main ways to create a subsidiary LLC. Let’s look at each one in order.
The first way
You must perform a special protocol – the charter of the proposed association, where all the conditions to be fulfilled must be observed. If the parent company is in the hands of multiple shareholders, it is best to document each of them. Legal confirmation of the formation of the subsidiary should be a protocol. Don’t forget to include your contact information. Keep in mind that only the head of the main company has the right to sign such a document. As mentioned above, it is important to pay off all debts at the time of opening a subsidiary. If the latter have difficulties due to insufficient funding, it will have to face losses in favor of the head office.
Legal confirmation of the formation of the subsidiary should be a protocol.
Once all the above documents are completed, a Chief Accountant is appointed and all the documents are to be taken for tax office registration. After that, you can assume that your subsidiary is ready to operate.
The second way
This is considered when one company is part of another on the basis of a mutually beneficial agreement or because of its competitiveness. This method is popularly known as acquisition of a weak company. Before taking this or that company under its purview, the prospective parent system instigates the destruction of this company, which then misappropriates a small amount. A notable example is the connection of such acquisition automobile concerns. In particular, large companies such as Volkswagen, Toyota and General Motors have amassed most of the popular car brands in their hands.
Conditions of creation
Even when merging one company with another, it is necessary to meet the following conditions:
- It is important from the beginning to determine the direction of the sub-community.
- Do not forget that production can vary considerably, because even if the subsidiary is controlled by the parent, it is still an independent company. Therefore, a charter designed for a subsidiary does not apply.
- The downstream company must have its own, bank number, address and personal. Appoint a director, an accountant, and talk to them about profit.
You must contact the State House and provide the following documents:
- Bank statement about your account.
- Charter signed by you.
- Characteristics of support staff.
- Address of the subsidiary.
- Written information about the founder.
- Certified copies of financial transfer and acceptance certificate and payments.
Advantages and disadvantages
In the work of any subsidiary, there are both pros and cons. For example, the advantages include that these types of companies do not have to worry about their own debt. In the event of bankruptcy, all costs will be borne by the primary company. As well as the costs of maintaining a subsidiary. The head office will also take care of the competitors.
In the event of a bankruptcy of a subsidiary, all costs will be borne by the primary company.
Disadvantages include the restriction of freedom. It is very difficult to create when the company is under the control of another association. In addition, there is a risk of closure because if the bankruptcy threatens the parent company, maintaining the latter subsidiary will be costly. In this case, you urgently need to find sponsors or new sponsors.
Management of the subsidiary LLC
Once created, it is important to reverse and pay special attention to the methods of managing the subsidiary LLC and select the most suitable one. In particular, the following options can be distinguished: sole proprietorship, board of directors, management company, representatives and board. We propose to read each one separately.
Management through an executive body, whose role is the most common method of general manager organization. The method is the tasks and problems of the independent decision merger, the removal of the assets of the company, the value of which does not exceed 25% of the assets of the company and the appointment of workers. This is further elaborated in Federal Law No. 208 of December 26, 1995 (Art. 6 and Section 1, Art. 78). In such cases, it is necessary to obtain a regulation of the rights and obligations of both parties for the natural and mutually beneficial work of the “daughter” and the “mother”. And such as head change. The opinion of all stakeholders should be taken into account or the board of directors should be convened.
In the event of a head change, the views of all stakeholders should be taken into account or the Board of Directors should be convened.
The latter is one of the ways to manage a subsidiary. That is, the top management or owners of the parent company participate in the work of the board of directors of the subsidiary. This scheme is highly desirable for small holdings.
The third option is company assistant management. It is a parent system and was created specifically for these purposes. This method allows you to focus on control and allocate resources more efficiently, but the management company is limited in the number of items it can handle.
Finally, the last methods of management are the delegates and the committee. In the first case, the parent company introduces its representatives to the board of directors and determines for itself the range of issues it controls. The second option provides access to representatives of subsidiaries head office of management staff.
Subsidiary or branch
Often these ideas confuse each other. But they are not synonymous. You need to figure out what the difference is and do not make such mistakes.
Therefore, the subsidiary is a legal entity and all its decisions must be agreed with the parents in the form of a contract. It can be located only in the area where the main association is registered and is capable of engaging in activities that are fundamentally different from the activities carried out by the parent company. In turn, it duplicates the aggression of the flagship, is not considered a legal entity and is geographically completely ubiquitous. Furthermore, the department completes all transactions on behalf of the parent company.
In conclusion, I would like to note that it is quite reasonable to create a subsidiary so widely in recent years. If everything goes right, it allows smaller companies to float, and bigger companies to expand further, gain new customers and increase their capital.
There are many instances where a company has grown to such an extent that it needs to expand or, conversely, increase its profitability. Often, the management of such a company will stop at the option of creating one or more subsidiaries.
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Subsidiary – A law firm created by another company or founder by transferring to him a share of his property funds. The founder of the created company approves its charter and appoints the chairman. In addition, the founder is granted several ownership rights in relation to a subsidiary under current law.
The main purpose of creating subsidiaries is to allocate internal resources of the organization and to allocate most of the promising directions to separate specialized companies. Thus, the competition of the overall company also increases. In addition, the subsidiary is often engaged in very tedious routine work, and transaction costs and transactions can reduce financial and tax costs.
If a subsidiary is established abroad, it allows the growth of the entire company’s foreign economic activities due to customs and tax concessions. When multiple subsidiaries are formed, a holding is formed, and each so-called “daughter” has the right to choose her own tax regime, conclude contracts, and so on.
Benefits of opening
- First , creating a subsidiary is the right option for the development of foreign economic activity. Therefore, creating a subsidiary in the maritime zone will allow you to save money with the help of tax incentives when concluding transactions with foreign counterparties.
- Second , creating a subsidiary will increase the stability of the parent company. All hazardous activities may be transferred to its operations and the parent company shall not assume any responsibility for them.
- Thirdly the “daughter” may be assigned to do routine chores on a daily basis or to assign certain tasks to the execution of a specific project.
- Fourth, the subsidiary creates competition due to the company’s narrow specialization focus.
- The fifth subsidiary will have the opportunity to increase financial flows, investments and more.
How to open?
To open a subsidiary, you must:
- Select which direction the “daughter” will work.
- Draw the charter of such a company and indicate all the important conditions. If there are multiple founders, a note of the association should be drawn up in which it is necessary to focus on the distribution of shares between each of them.
- Draw the minutes of the founders’ meeting about creating a subsidiary. In this case, only the chairman of the meeting, the secretary of the founding council or one of the founders must sign within minutes.
- Assign the legal address to the company. The director of the main company draws up a document about this.
- Must be registered with a law firm. In addition, the company must have its own current account, trademark, and details.
- Determine and appoint the Chief Accountant and Director of the subsidiary. Appropriate legislation must be drawn up and signed by the directors and chief accountant of both companies to facilitate the transfer of the financial share from the head company.
- The main company should not be burdened with budget debts , including taxes. In order to confirm the absence of such credit in the registry room, a letter should be requested, indicating that the company has no debts.
It is also necessary to make a statement on the p11001 form with the mandatory sign:
- Organizational and legal form;
- Data about;
- Legal address;
- The name of the subsidiary;
- Information about the founders and the sole management system;
Completed form along with the required documents, as well as the State Registration Certificate of the major company and copies of the passport of the Deputy Accountant and the Director of the subsidiary must be submitted to the Regional Tax Office. After passing the registration, the subsidiary will be able to carry out its functions fully.
Comparison with branch and representative office
The branch is an independent subdivision of a specific limited liability company. It should be located outside the main company location.
The branch is not a separate law firm, it operates out of the parent company or part of them. In addition, such section operates only on the basis of approved terms.
The branch does not own property. The head of the division is appointed by the principal body and removed from office and acts only by the power of attorney.
It does not operate independently, but on behalf of the company, it is responsible for the actions of the branch. The charter of the company contains all the data on the existing branches.
Representative Office and Branch This is a subdivision of a limited liability company which is not within the territory of the company. Unlike a branch, it performs the function of representing and protecting the interests of the community. Otherwise, everything will be the same with the branch.
Key differences between subsidiary, branch and representative office:
- The subsidiary is a separate law firm. It was created just like any normal limited liability company. It has its own authorized capital, which acts on the basis of the charter and is independently liable.
- The charter states that the subsidiary may be involved in any activity . The branch operates in the same direction as the company, and the representative office was created with the aim of representing and protecting the interests of the company.
- The subsidiary acts only on its behalf , and a branch and representative office from the parent company.
Opening a subsidiary is more profitable than opening a branch or representative office. It is independent in making any decision, is freely responsible for its obligations, and is jointly liable with it if it acts on the orders of the parent company.
Impact of the parent company on the subsidiary
The parent does not need to have a controlling interest in the company to control the subsidiary. They can operate on a contractual basis or legally. For example, the agreement states that a company may transfer the right to apply to another company for production technologies in a product, and that the subsidiary is obligated to coordinate with the company controlling product sales.
Responsibility of the parent company
The subsidiary formed is an independent company. She has her own capital and property. It bears no responsibility for the resulting debts of the parent organization and the parent company is not liable for the debts of the subsidiary.
But the law provides for two cases in which the parent company is liable for the subsidiary’s debts and claims:
- In the event of a subsidiary transaction under the guidance of the parent organization. Further, such order must be documented. V in this case both subjects are related to common duties. That is, any company is forced to repay the debt that arose to the debtors in the event of adverse consequences.
- If the subsidiary goes bankrupt as a result of the management activities of the major company. In such a situation, sub-responsibility arises. This means that if the subsidiary does not have sufficient resources to repay the loan, the parent company pays the remaining amount.
Now let’s look at all of the above with an example. Suppose there is a certain company “Crystal” located in Yakutsk. It has become very successful and the general meeting of the founders decided to expand the company.
The question of whether to open a subsidiary or branch network remains unresolved. Often they are parked in the subsidiary because the branch requires constant control from the parent company. In a subsidiary, you only need to appoint one director, who will be in charge and will be responsible for all the activities of the company. The result is an independent company. Also the parent company has to send financial statements and agree on some expenses.
Usually, when opening a subsidiary, the name of the parent company will be changed. Therefore, Crystal opens a subsidiary in Moscow. The name of the subsidiary may be a few letters, for example, DK Kristall.
The key company frees itself from control and guidance through the company’s current documentation. The head of the subsidiary is responsible for the management of the parent company. It expands the competitiveness and profitability of the parent company, but at the same time simplifies life in managing the subsidiary.
A legal independent entity created by the parent organization by converting a portion of the property. The subsidiary cannot make most decisions without the consent of the parent company, and therefore, they share responsibility for the consequences of these decisions. However, there is a feature: the subsidiary is not responsible for the responsibilities of the parents.
Why is the subsidiary formed?
The main objectives of creating a subsidiary are:
- The activities of a particular type of major company that enhance the special status .
- Ability to use the assets and resources of the parent company more efficiently and effectively.
- Opportunity to start economic activity “blank board” that is, without the debt of the parent company.
- Risk reduction through diversification (subsidiary creates a new type of function).
To achieve these goals (and generally for effective operation), a subsidiary must:
- Try to improve the competitiveness of the products.
- Appoint professional leaders.
- Try to minimize the cooperative relationship with the parent organization.
Symptoms of subsidiaries
- There is an element of legal influence (regulation) in the relationship between the parent and the parent. The presence of this element means that the parent company can have some influence over the decisions made by the subsidiary.
- The subsidiary has the status of a law firm, which distinguishes it from, for example, branches and representative offices. This situation leads to many other aspects – for example, a subsidiary may be located in the same location as the principal, which is again excluded from the branches.
- A subsidiary may have any of the institutional and legal forms.
- The law distinguishes between the views of pro and subsidiaries. If a subsidiary expects parental involvement in potential decision making, then the dependent agency cannot determine anything without agreement with the parent.
The managers of the parent company do not have the right to directly manage the employees of the subsidiary – they are influenced by the management systems of the subsidiaries. The following is important: Any order of management of the parent company shall be implemented only in consultation with the managers of the subsidiary in nature and after their confirmation. However, as a rule, it is not difficult to lobby for such an order because the representation of the key company in the subsidiary management bodies is crucial.
The parent company does not have to be the owner of a large number of shares in the subsidiary to influence management decisions – this opportunity is provided in a special agreement signed when the subsidiary is established. The Agreement regulates the following aspects:
- The purpose of the powers of the head of the controlled company.
- Procedure for dismissing the Chairman and appointing a new one.
- Procedure for distributing the profits of subsidiaries.
- Procedure for deciding whether to dissolve or restructure a subsidiary.
Is the parent company responsible for the subsidiary?
The Civil Code defines the parent company’s two liability cases for the subsidiary’s debts:
- The loans appeared to be due to the subsidiary complying with the parent company’s order (supporting documents required).
- Due to the fault of the main company, the subsidiary became bankrupt.
The transition process for them involves the use of mechanisms of control and influence between companies and their competence. Western Europe is considered to be past this level for the United States and the nations . About the Russian Federation, here it is still far from over.
The above is explained by the weakness of the domestic regulatory framework. She is the one who regulates the pro relationship. However, there is a plus in this situation. We talk about the possibility of using someone else’s experience that has been tested over time. However, this is not always implemented by the legislator. In this case, it is good to study the theoretical issues related to the interrelated relationship between business entities. This will significantly reduce the list of problems that may arise in practice.
What is the opinion of subsidiaries and subsidiaries? It is necessary to specify the relevant law. Accordingly, if another economic entity has the ability to determine the decisions that one company makes, it is considered a subsidiary. This can be done by concluding a contract, participation in authorized capital (in practice) or otherwise. Everything in the same article refers to the concept that defines the term “dependent community”. The dominant body will be recognized if it holds more than 20% of the relevant shares of the former.
Management of subsidiaries and subsidiaries
The existence of an element of indirect economic and legal control is mentioned here. This can be found in the relationship between dominants and parent-parent organizations. The existence of control signifies the existence of a relationship of subordination and power. This also applies to obedience. Thus, subsidiaries and subsidiaries are interconnected. Importantly, one degree or another, can lead to restrictions. That is, they affect the decisions made by the subsidiary. In particular, this applies to those approved by the Board of Directors or the general meeting of shareholders.
Subsidiaries and affiliates. Features of the process
They do not lose the status of a law firm because they have an element of obedience. That is, we are talking about an independent matter of civil law relations. According to this scenario, subsidiaries and affiliates are fundamentally different from representative offices and branches. The latter are considered only subdivisions of the companies that created them. In this case, there are many more nuances. For example, subsidiaries and subsidiaries can be created anywhere. This also applies to the location of the main system. This is excluded for representative offices and branches.
The nuances of creation
This institutional and legal form is not named in law. In this regard, it can be concluded that subsidiaries and subsidiaries can be formed in any form permitted by the legislation of the Russian Federation. These are the following business entities:
- With extra responsibility.
- Joint stock.
- With limited liability.
The Common features that subsidiaries and affiliates are assigned at a time … is the legal relationship. However, there are some differences between them. The basis of a subsidiary is the criterion of the ability of the dominant structure to determine its results. At the same time, dependency is determined by the formal condition for the organization’s participation in its authorized capital.
Focus on the goal
There are some difficulties when using this criterion. It’s about how to define the word “importance”. This allows the company to be primarily recognized, even if it owns less than 20% of the subsidiary’s voting shares, in the absence of a formal amount of participation in the authorized capital. Participation in practice has many specific nuances. This does not mean that the main company will affect all the decisions of the subsidiary.
Financial and Industrial Committees, Concerns and Stocks
The organization of companies incorporated by regulation and economic orientation was formed by the main company in association with subsidiaries. It can be called a finance and industry group (RF), a holding (UK, US) and concern (Germany). The content of these systems is identical. Thus, for more convenience, one general term – “caught”. Its creation is objective from the point of view of business practice.
So, the company has become much bigger. Increases, expands investment plans… becomes necessary creation company divisions sidiaries… requires a specific hierarchy. This will reduce taxes and other mandatory payments. This situation is very natural for business growth. Accordingly, we can say that the holding manifests itself automatically. In essence, what are the biggest Western companies today? These are whole organizations, consisting of major and sub-communities, which are interconnected. These are groups of individuals united under a corporate name.
According to statistics from the publication of Le Monde Diplomatic in the 90s. About 37 thousand transnational companies were operating. With them, there were about 170 thousand branches and subsidiaries. In Russia, there are manylarge large companies, therefore, there are subsidiaries and subsidiaries of the Russian Railways, RAO “Gazprom”, YUKOS, LUKOIL. Currently, many domestic companies in the medium and small businesses are characterized by a similar structure of corporate operations in one form or another. With the help of the structure of the holding system, many important tasks, among them:
- Arranging for the implementation of an agreed sales and production policy;
- Efficient management of subsidiaries.
At the same time, there is no special legal regulation. Also, in Western countries it is there. Therefore, the potential of this structure is not fully realized.