WHAT IS THE RELATIONSHIP BETWEEN PARENT AND SUBSIDIARY COMPANY?

A parent and subsidiary relationship is created when a company purchases a controlling amount of voting stock in another company.

CHAMAN LAW FIRM

6/3/2022 1 min read

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WHAT IS THE RELATIONSHIP BETWEEN PARENT AND SUBSIDIARY COMPANY

Who is a Parent Company?

When one company have the direct or indirect power of the decision making on another company, such relationship is known as a parent company subsidiary relationship.Also, a parent company and subsidiary is created when a company purchases a controlling amount of voting stock in another company.

What is the a Subsidiary?

In business parlance, the subsidiary means a controlled company or affiliate that belongs to another company which is the mother company (parent) and whose decision-making power is directly or indirectly subject to the latter. The subsidiary company can be in the same industry as the parent company or can be in a related industry.

Although the parent company can usually control most of the shares of the subsidiaries, also responsibility is placed on them to decide the financial and operational system of the subsidiary. In cases where a subsidiary is 100% owned by another firm, the subsidiary is referred to as a wholly-owned subsidiary. These become very important when discussing a reverse triangle merger (a subsidiary created by an acquiring company, purchasing the former a target company, and being absorbed by the target company).

A good understanding of the differences between a parent company and a holding company can help you modify your business interests, reduce legal liability and manage tax obligations. While the literal definitions of the two business structures seem similar, the relation between the two is unlike that of parent and child relationship in that the legal consequences of organizing your projects under each type of structure is generally quite different.

NB: This article is not a legal advice, and under no circumstance should you take it as such. All information provided are for general purpose only. For information, please contact chamanlawfirm@gmail.com

WRITTEN BY CHAMAN LAW FIRM TEAM

EMAIL: chamanlawfirm@gmail.com

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