What are Subsidiary Companies?
A subsidiary company is any company that is majority owned and controlled by another firm. Many well known businesses and brands are actually subsidiaries. For example, PepsiCo, the multi-billion dollar snack and beverage giant, itself owns many other famous brands. In fact, in the late 1990s PepsiCo purchased the Florida founded brand Tropicana. Big companies choose to establish and acquire subsidiaries for a variety of different reasons. Though, the benefits offered by subsidiaries are not simply restricted to the world’s largest conglomerates. Setting up a subsidiary company may also be advisable for your business. If you have any questions about subsidiaries or Florida business formation in general, please contact an experienced West Palm Beach commercial litigation lawyer today to discuss your legal options.
Four Advantages of Setting Up a Subsidiary Company
- Limiting liability: By establishing a subsidiary, a parent company may be able to significantly reduce its liability risk. Limiting liability is generally considered to be the biggest advantage to using subsidiary businesses. Companies often operate different locations or aspects of their business as subsidiaries to exercise this liability protection.
- Creating a new brand: In some cases, subsidaries can simply help to facilitate effective branding and marketing. As was mentioned, a major company like PepsiCo operates many different brands as subsidiaries. These brands may in some ways be contradictory. For instance, PepsiCo operates both Doritos and Quaker Oats. It may be desirable for the company to easily distinguish between the snack food and healthy food parts of their business by legally separating the brands.
- Separating management: Subsidiaries also allow companies to easily set up different management structures. This can be very useful for some businesses. For example, it may allow a company to create effective incentive-based compensation plan that is uniquely tailored to the individual needs of specific part of a business.
- Attracting investment: Finally, a company may be able to attract additional investment by using subsidiaries. In certain circumstances, this type of overall business structure offers investors increased options.
Are There Any Drawbacks?
Similar to other business arrangements, there can certainly be drawbacks to establishing subsidiary companies. Above all else, it will add a considerable amount of complexity as well as compliance costs to a business. The parent company will have to worry about running multiple organizations, while keeping the records completely separated and always conducting any transactions at an arm’s-length. If the company fails to follow proper legal protocols, it could lose the legal protection provided by the subsidiary. This would undermine the entire purpose of setting up the subsidiary in the first place and it could expose the parent company to liability. Before creating a subsidiary company, it is imperative that you consult with a qualified business law attorney.
Do You Need Legal Assistance?
Our business litigation attorneys can help. At Pike & Lustig, LLP in West Palm Beach, we have extensive experience handling a wide variety of business issues, including questions of formation, compliance and litigation. To learn more about what our team can do for you, please call our office today at (561) 291-8298 to set up your free initial case evaluation.