The Subsidiary Companies are those that are under the control of other companies that carry the matrix name to which they belong, they are due to mainly the parent company and have the authority to control a large number of different priority actions, which leads to being the dominant company.

Despite this, subsidiary companies have a high level of independence, since they have different corporate relationships with the dominant company. This is because subsidiary companies have their own management and control bodies and in turn have their own capital.

The objective of the subsidiary companies

The existing objective in certain business functions, based on the formation of various subsidiaries, is very important to understand that there are large international companies or also known as business holding companies.

Although the parent company can usually control most of the shares of the subsidiary companies, it allows them to take control and take responsibility for all their decisions related to the financial and operational system.

This type of business practice responds to different reasons that focus on finding a way to increase the amount of business and at the same time transform the possibilities of risks, this leads to the alternative of carrying out an adequate vertical integration process.

Characteristics of Subsidiary Companies

As we mentioned earlier, the parent company allows subsidiary companies to have control and responsibility for their actions and decisions, therefore, in relation to this, some characteristics related to these types of companies can be mentioned, such as the following:

  • They are determined as legal and economic units.
  • In these companies, you can set various objectives.
  • They can organize and integrate resources, either their own or others.
  • They use the management of a parent company to carry out their own operating system.
  • Its operating system is in accordance with the updated labor, health, fiscal and ecological laws, among others.
  • They are based on purchase and sale negotiations.
  • They focus on constantly improving their products, their process and the quality of their services.

Accounting of subsidiary companies

When a given parent company controls its financial statements, it is likely that it will need to account for its subsidiaries. That is why the International Society for Financial Training Standards usually applies some accounting standards that are included in international regulations.

These regulations are carried out by the other companies and in turn, must account for them. This defines that the parent companies have a duty to present the consolidated financial statements, which account for all their subsidiaries.

Types of subsidiary companies

Some of these companies have their beginnings as independent companies, however, in the future, they end up pointing their assets to large companies. When these large companies acquire most of their shares or consolidation of some kind of agreement with the owners of the subsidiary company, they become a subsidiary company.

There are other companies that develop outside the parent company, starting with divisions that are increasing, but in the end, they operate under the control of the parent company, however, many of their functions can be performed with their own independence, such as the sale of their own products and determine internal decisions.

Other companies only operate at the service of the parent company and have little autonomy regarding the decisions of their own productions and operations.

What is the principle of subsidiarity applied in the business world?

These types of companies are based on the principle of subsidiarity, which confirms that any operation must be exercised by whoever is closest to it. This means that this type of company is under the domain of a larger company.

This domain is usually carried out through the majority purchase of the shares of the subsidiary company, that is, for this type of company to exist, there must be another one of a higher level, such as the parent company.

Many companies do not start as a subsidiary, some begin the journey of their functions independently until the parent company decides to acquire it.

Advantages and disadvantages of Subsidiary Companies

There are many advantages and disadvantages that must be taken into account in case you want to use them as strategies. Among them we can highlight the following:

Advantage

  • From the point of view of this type of company, the inconveniences associated with the financial system are significantly reduced.
  • A parent company is carried out with the actions of this type of companies, which will save the expense of forming a new company and at the same time, the fixed expenses significantly.
  • In relation to the various strategies applied by the market, the parent companies manage to acquire from the subsidiaries, obtain high market shares, which will help decrease the closest competitiveness.
  • This type of company can decide if you want to be part of a parent company in order to obtain financial support that is greater than the one you already have, which can help you grow as a company and also expand.

Disadvantages

  • It is a business model that does not adapt to any type of product or service that is within the market competition.
  • This type of company usually has many limitations in relation to its independence, since it depends entirely on the main company or parent company.
  • A parent company has a duty to strictly control the accounting system of this type of company.
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