As business enterprises have grown in size and complexity, it is not uncommon to find them owning and/or controlling one or more subsidiary corporations. These subsidiary corporations may be for-profit subsidiaries, or in some cases even nonprofit subsidiaries. In either case, the relationship between a parent company and a subsidiary may create some unique problems for the parent company.
Why A Subsidiary?
There are many reasons why a business enterprise may establish a subsidiary corporation. These reasons often include, for example: (1) the parent company desires to engage in a new line of business activity unrelated to its current business; (2) the existing or projected revenues from the new line of business activity are substantial; (3) the business enterprise prefers not to expose its assets to the liabilities associated with the new business line; or (4) the new business activities may carry risks of liability unacceptable to the parent; (5) the parent is a public corporation and it desires to keep the subsidiary privately held; (6) the parent wants to posture the subsidiary for going public without affecting the parent's shareholders; or (7) that the organization desires to reward certain employees with increasing compensation, etc.
The Parent/Subsidiary Relationship
It is common to use the term "parent/subsidiary" when describing the relationship between a business enterprise and its subsidiary. But, a caveat is in order here. The term "parent/subsidiary" is not equivalent to the term "parent/child". This is an important point. While the parent business enterprise may incorporate its subsidiary corporation, name its board of directors and officers, enunciate the subsidiary's business purpose, adopt bylaw provisions preserving the parent's control of its subsidiary, etc., it is important that the subsidiary be established and recognized by the parent, as well as third parties, as an independent corporation managed by a board of directors.
Subsidiary Independence: A Stumbling Block?
The matter of subsidiary independence is oftentimes a stumbling block to the parent business enterprise which may view an independent subsidiary as an uncontrolled subsidiary. But recognizing a subsidiary as an "independent" corporation is not the equivalent of regarding the subsidiary as "uncontrolled." At all times, provided that appropriate bylaw provisions are adopted and maintained, the parent has the legal authority to hold the subsidiary accountable to meet "bottom line" financial objectives, to pursue acceptable policy mandates, to fulfill its goals and to otherwise conduct its affairs in a manner pleasing to the parent.