To grow your business without taking on the financial risks of a new venture, you may consider forming a subsidiary company. Here’s what to know:
What is a subsidiary company?
A subsidiary company is an independent business entity owned by an existing business entity. For example, if you own a corporation and want to expand your business, you can create a new company (like an LLC or even another corporation)—and it can be owned by your existing corporation. In this case, the new company would be the subsidiary, and that initial corporation would be known as a “parent company” or “holding company.”
Why do companies create subsidiaries?
Subsidiaries can be helpful for a number of reason, including establishing unique brands and mitigating financial risk:
- Branding – Large companies often house different products within separate business entities to maintain brand recognition. For example: ESPN is a subsidiary of The Walt Disney Company. Different names, different products, different companies—but one is owned by the other. (Within smaller companies, separating brand names can be achieved by obtaining a DBA.*)
- Limited liability – Perhaps the most popular reason to create a subsidiary company is to expand business while protecting the core company from added financial risk. While the main company will often fund its new LLC or corporate subsidiary, the parent company will also benefit from limited liability protections.
*Learn more about DBAs on Northwest’s page: How to Get a DBA (Doing Business As) Name For Your Business.
How do I create a subsidiary company?
If maintaining liability protection is important to you, you’ll probably want to consider forming an LLC or a Corporation. Once you know what business structure you’d like to form, you’ll need to secure a Registered Agent in your state, then follow the protocols for registering a business, as outlined by your secretary of state (or equivalent governing body).
One thing to keep in mind when forming a subsidiary is that you’ll want to make sure your current company is listed as the owner (or LLC member). This needs to be the case both within your formation documents with the state, and within your internal records, either your LLC Operating Agreement or your Corporate Bylaws.