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In legal terms, a company is a group of individuals who have formed an association in order to carry out, keep up, or otherwise engage in an industrial or commercial enterprise. There are different types of companies, and some of those include a holding company, a joint stock company, a limited liability company, a trust company, a parent company, and a subsidiary company. A subsidiary company — the generic meaning of subsidiary is to be subordinate — is a company that is controlled or owned by another company. The company that owns or controls the subsidiary is called a parent company.
There are several different types of relationship that a subsidiary company may have with a parent company. In one type of relationship, the parent company is a holding company, meaning that its primary function is to control other firms rather than to engage in business of its own. The holding company owns the majority of shares in the subsidiary. If the parent company owns all the stock, then the subsidiary is a wholly-owned subsidiary.
The arrangement of a parent company and a subsidiary company differs from a merger, in which the company that is owned is submerged into the purchasing company’s identity and corporate structure. The comparison between a subsidiary and a merged company brings up another fact about these types of companies that distinguishes that relationship from a merger: a subsidiary company can be created, rather than purchased. Another important distinction is in the role of the stockholders of the acquired company. While the approval of the stockholders is required for a merger, it is not required when the company becomes a subsidiary by purchase of a controlling interest in it.
The formation of a subsidiary company may be of benefit to a multinational corporation that wants to adapt its business to work within the legal parameters of a specific country. Forming a subsidiary is often less expensive than merging. In addition, a subsidiary retains its branding, which may have irreplaceable market value, and maintaining a subsidiary rather than merging can limit liability in a risky venture due to the separation of corporate identities.
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