When a company has complete ownership of a secondary company the secondary company is a subsidiary company. There are many large brands and businesses across the world that include subsidiary companies as a major part of their business model.
Benefit of a Subsidiary Company
There are a few main reasons why a company would choose to open a subsidiary. These reasons can include brand recognition, fundraising, and selective disclosure purposes.
If the benefits and reasoning for setting up a subsidiary company resonate with you, I encourage you to reach out to an experienced business attorney such as myself at email@example.com to go over the specifics.
Holding Company vs. Parenting Company
When a company purchases a secondary company for the purpose of establishing a subsidiary, the primary company becomes a parent company. It is also sometimes called a holding company, depending on the purpose of the secondary company.
If you are curious about the difference, the two essentially the same thing with one tiny exception. A holding company is a business whose sole purpose is “holding” shares of various other companies.
How Do You Open a Subsidiary Company
Have you decided opening a subsidiary company is in the best interest of your current business model?
In the time I’ve been an entrepreneur attorney, I’ve found the easiest way to explain how to do things in the business world is through an actionable step guide. So, I’ve broken down the process of establishing a subsidiary company into six simple steps.
Here are the six simple steps you will need to follow:
- Get the Ball Rolling
- Choose a Business Structure
- Prepare and Create Articles of Incorporation
- File Formation Documents with the State
- Back the New Company with Capital
- Establish Internal Management
Get the Ball Rolling
If you already own a company and have decided that you want to open a subsidiary company, the first step is to legitimize the decision.
Authorize the start of your new subsidiary company buy holding a board meeting or at least a meeting of the managing parties. You need to put the opening of the additional company up for vote.
Once everyone has placed their vote (hopefully in favor of your subsidiary) record the results and make sure those results are readily available in your company’s records for legal purposes.
Choose a Business Structure
Once your board or managing parties have elected to create a subsidiary you will next want to make an official decision about that subsidiary’s business structure.
Subsidiary companies are most commonly set up as a corporation or as a limited liability company.
Well, because these two structures are the most ideal for a company being supported by a parent company.
Both a corporation and an LLC allow for the setup of separate liabilities from the parent company and have a structure that lets the existing parent company to maintain all of the controlling interest in the subsidiary company.
This decision is important and should be based on the needs of your company.
This is the point in the process when I recommend reaching out to a CPA or contacting an experienced business attorney such as myself via firstname.lastname@example.org if you run into any questions or concerns.
Prepare and Create Articles of Incorporation
Once you have decided on your company’s structure, you need to prepare to create the Articles of Incorporation.
You will want to start by selecting the state that you want to open your subsidiary in. You will then want to do some research and sit down with your business attorney to make sure that you are familiar with that states business statutes so that you can properly draft your articles of incorporation or articles of organization.
The exact type of document you draft will vary depending on the structure you select, but this is something your business attorney can help you with.
While state statutes and processes may vary slightly, most states have very similar procedures and requirements for drafting these documents. These procedures include creating a unique business name to identify your company and identifying your official legal address for business purposes.
You will also want to make sure you establish a registered agent.
What is a Registered Agent?
In terms of a business, a registered agent is a live person that is present at a certain mailing address during regular business hours whose sole purpose is just to receive official mail and legal correspondences on your behalf.
As you create your documents, be sure to state that your existing parent company is the sole owner of the new company. You will also likely want to include language provisions that legally prevents the amendment of your company’s articles.
Filing Your Formation Documents with the State
It’s time to take your newly drafted documents and file them with the state registrar. In most states this means you will need to take them and have them processed through the secretary of state’s office.
Try visiting your secretary of state’s online website to check for any specific filing requirements or instructions that may be posted. They may also have examples of pre-approved formats and templates and information about any filing fees that would need to be taken care of.
Once your state accepts your documents, you company will officially exist! There are just a few more steps you need to take to complete this process.
If you need assistance with filing the paperwork properly please reach out via email@example.com as it is always in your best interest to file the paperwork the right way the first time.
Back the New Company with Capital
Now that you have registered your business and have been approved as an entity, you need to back your subsidiary with capital and assets.
You will need to make an official transfer of assets and capital into the new company so that your new company can begin handling its day to day operations.
As you set this up, it should be documented that this initial transfer be for the parent company’s ownership of the subsidiary.
Establish Internal Management
Once you are registered as an official business entity and have taken the steps to grant sole ownership to the parent company, there are just a few loose ends to tie up.
First, you will want to draft a set of complete bylaws for your new subsidiary. As you create them, make sure to document the parent company’s official procedures for appointing or changing board members.
You will then want to appoint said board members as they will be responsible for managing the subsidiary as its own entity while still being tethered to the control of the parent company.
Once the parent company has appointed a managing board, the process of opening up a functioning subsidiary company is complete.
What To Do Next
Opening a business is a process that is often complicated and requires at least a base knowledge of state and business laws. I highly recommend completing these processes under the advisement of both a CPA and a business lawyer.
Having a professional business attorney on your side can really make a huge difference in the speed at which you accomplish things and can certainly minimize room for crucial errors and legal mistakes.
My name is Sam Mollaei and I manage a virtual business law firm that allows me to assist aspiring business owners all over the world. If you are ready to set up a subsidiary business, I’m ready to help.
Email me at firstname.lastname@example.org – I’m always open and available to business owners in need of a lawyer. Contact me!