How to Create a Subsidiary Company by Brette Sember, J.D.

How to Create a Subsidiary Company

Creating a subsidiary company correctly lets your company diversify by trying out a new business. But doing it wrong can undermine both parent and child.

by Brette Sember, J.D.
updated May 18, 2018 · 3 min read

Adding a subsidiary company to your business will allow your parent company to grow. There are both advantages and disadvantages to adding a subsidiary business, so be sure to consider them.

Also, when setting up your LLC subsidiary or corporate subsidiary, it is important to follow the correct steps so that your business entity meets all requirements.

Deciding Whether to Form a Subsidiary

The subsidiary company definitionl specifies a company that is owned (in part or in full) by your main company. Creating one gives you the freedom to diversify and try out new business opportunities without risk to the primary company.

When you learn how to create a subsidiary company correctly, you are able to maintain the companies as two different legal entities so that losses in the subsidiary are not losses for the main company.

Creating a subsidiary also gives you the opportunity to jointly own it with another business, allowing for joint ventures (in general, though, your subsidiary will be wholly owned by your parent company).

The parent company may remain liable for damages if the subsidiary violates the law or defaults on loans, so there are risks involved in creating a subsidiary.

Choosing a Subsidiary Type

When you decide to form a subsidiary, you need to decide on the structure for the new organization, since it must be a separate legal entity. You can create a subsidiary LLC or a subsidiary corporation:

    If the parent company is a parent LLC, you will likely want to form the subsidiary as an LLC. A subsidiary LLC will give you pass-through taxation (no business taxes are paid and you as an individual will pay taxes on profits).
    If the parent company is a corporation, you will likely want to form the subsidiary as a corporation. The subsidiary will be responsible for its own taxes and debts, but you will receive the profits.

Also, if the parent company is currently a sole proprietorship, you will want to change it to an LLC or corporation before creating the subsidiary so that you can create a legal distinction between you and your businesses.

Forming Your Subsidiary

To form a subsidiary, you must hold a meeting of your board of directors or management and vote on the decision to form a subsidiary. Indicate the type of business entity that has been chosen for the subsidiary. The resolution should be signed by the chairman and archived.

Choose the state in which to form your subsidiary and complete the paperwork required by that state. You will prepare either articles of incorporation (for a corporation) or articles of organization (for an LLC). Choose a name for your subsidiary that is not already in use in that state and choose a registered agent within the state for legal service.

If you form the subsidiary as an LLC, you will list the parent company as the owner on the formation documents. If you form the subsidiary as a corporation, you will issue all of its stock to the parent company. File the formation documents with the Secretary of State in the state you have chosen.

Getting Started with Your Subsidiary

You will need to establish bylaws or an operating agreement for your subsidiary. This will include the procedures that must be followed to appoint or remove directors for the board. The parent company will also need to capitalize the subsidiary by transferring funds to it in exchange for its ownership right.

Appoint directors to the board. They will now be in charge of the operations of the subsidiary. The parent company maintains control over the subsidiary through its ability to remove and appoint directors to this board but, other than that, the subsidiary operates independently.

A subsidiary can be an excellent way to grow your company's reach and move into new markets. Proper formation of the subsidiary will allow it to run smoothly.

If you're thinking of creating a subsidiary company, you many want to speak to an attorney who can walk you through the process. LegalZoom can put you in touch with an attorney who can answer your questions about forming a subsidiary for a low monthly fee. Learn more about LegalZoom's business legal plan.

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Brette Sember, J.D.

About the Author

Brette Sember, J.D.

Brette Sember, J.D. practiced law in New York, including divorce, mediation, family law, adoption, probate and estates, … Read more