Subsidiary company

A subsidiary company is a legally independent enterprise, separated from the parent (main) economic entity, established by the transfer of part of its property (capital). As a rule, acts as a branch of the parent company that established it.

The charter of such an enterprise is approved by its founder, which retains certain managerial, control and other administrative functions in relation to it. The ability to control the activities of a subsidiary is guaranteed by the ownership of its shares and is built on the principle of the participation system.

The subsidiary company exists in the difficult conditions of the parent company's participation in its capital. That is, it is in a dependent state from the head office.

Until 1994, the term "subsidiary organization" was understood as such an enterprise, most of the fixed assets (capital) of which belonged to another company. After the adoption of amendments to the Civil Code (Article 105), the meaning of the term has changed. Now "subsidiaries" are understood as economic companies created by other companies due to the predominance of their participation in the authorized capital or having the opportunity to monitor and approve decisions taken by such enterprises. In other words, the emphasis is on the right of the parent company to determine the decisions made by its branches.

Relations between parent and subsidiaries are based on the principle of the main company's liability for the obligations of the enterprises it establishes. They are jointly responsible for transactions concluded in compliance with mandatory instructions of the parent enterprise. In the event of bankruptcy of the subsidiary company through the fault of the parent company, the latter must bear subsidiary responsibility for all obligations.

A subsidiary company is created by establishing a new organization or separating it from the structure of the parent company.

Usually, the decision to create it is taken when it is necessary to concentrate production in specialized areas in order to increase the competitiveness of an economic entity, to develop new markets. New business units are, as a rule, more mobile, flexible, quickly reacting to changes in the market of a certain product. The most urgent issue for the creation of units is for large manufacturing enterprises.

As it was said, there are two ways in which a subsidiary company can be created: the reorganization of the existing company (including the form of allocation) and the establishment of a new one. A more common way is to allocate it when reorganizing legal entities. In this case, one or several companies may be created without terminating the activities of the company that is experiencing reorganization. The choice of the method of creation depends on many factors.

Organizational aspects and existing terms play an important role in this. The procedure for the reorganization of a legal entity is rather complicated and time-consuming (takes up to six months). Establishment of a new society is a simpler and shorter event (it can be completed in two weeks). In addition, when choosing the method of establishing a subsidiary, factors such as the establishment of a decision-making body are taken into account; Notification of creditors; Questions of succession and others. In addition to organizational problems, there are also tax risks associated with the payment of VAT and income tax.

The decision on the way in which the subsidiary will be created is related to an analysis of the advantages and disadvantages of each of the above, taking into account the individual characteristics of the parent organization (the composition of assets, production volumes, etc.).