Back To: BUSINESS ENTITIES, CORPORATE GOVERNANCE, & OWNERSHIP

What is a Parent Company?

A parent company refers to a firm that controls the management of another firm, and takes an active part in its operations. Based on the control offered to subsidiary company, parent company can work as hands-on or hands-off owners for the subsidiary firm. 

Key points:

1. A parent company is an organization that has an influential control over the other company.
2. Parent firms can operate as hands-off or hands-on owners of the subsidiary firms on the basis of the extent of managerial powers offered to subsidiary executives.
3. Parent companies are a result of acquisition or merger.

How Does a Parent Company Work?

A parent company and a holding firm are different from one another. While parent companies operate independently, holding companies are formed in order to own and control a cluster of subsidiaries, which is mostly for tax objectives. Parent companies can be a result of conglomerates that comprise of a number of varying businesses such as General Electric, that operates a diverse range of business units which get benefitted from cross-banding. Also, there can be a horizontal integration between parent companies and their subsidiary firms. For example, Gap Inc is the parent company of Old Navy and Banana Republic. On the other side, there can be a vertical integration between companies if they own many firms at varied production or supply chain levels. AT&T acquired Time Warner which means that besides its telecommunications network, the firm is now the owner of film production and broadcast networks.

Becoming a parent company

Companies can be parent companies either by acquiring smaller firms, or by spinoffs. Usually, big companies acquire small companies for eliminating competition, increase their business operations, decrease overhead costs, and to achieve growth. For instance, the acquisition of Instagram by Facebook was done to enhance user engagement, and make its social media platform more strong and powerful. At the same time, Instagram received benefit from getting one more platform to advertise and promote. However, Facebook has been lenient in controlling Instagram's operations, and has further retained the founders and CEO of Instagram. Companies may want to maintain the pace of their operations by spinning off subsidiary businesses that are not profitable or efficient. For instance, a firm can spin off its subsidiary business units that have stopped growing, and can further emphasize on some other product or service that has more potential for growth. In case, a business unit that has a strategic policy different from that of the parent company, can be spun off so as to identify its worth on an individual level.

Special considerations: accounting for subsidiaries

Since parent companies need to own at least 50% of the stock of the subsidiary firm, they should create consolidated financial statements comprising both the parent and subsidiary company. It should be ensured to avoid any scope of overlaps including transfers, loans, payments, and inter-company, and duplication of data. The consolidated financial statements present complete information about the complete financial health of all companies instead of just one. In case, the parent company's stake in the subsidiary company is less than 100%, the accountant should record a minority interest on the balance sheet representing the percentage of the subsidiary that the parent company doesn't own.

Related Topics

• Business Entities (Intro)
• Why is studying business entities important?
• Considerations When Forming a Business Entity
• Holistic (Detailed) Overview of Setting Up a Business Entity
• What are Business Entities?
• What is a Closely-held vs Publicly-held Business?
• What are the main types of business entity?
• What are the primary characteristics of business entities?
• What is Creation of a business entity?
• Where to Form a Business
• Incorporating in Delaware
• Forming an LLC in Nevada or Wyoming
• Creating a Company Offshore
• Promoter
• Promoter Liability
• De Jure Corporation
• Ultra Vires
• Brassplate Company
• What is Maintenance of a business entity?
• What is Continuity of a business entity?
• Business Continuity Planning
• Buy Sell Agreements
• Shotgun Clause
• Winding Up
• Dissolving a Foreign Qualification
• What is the Ownership structure of a business entity?
• Joint Stock Company
• Parent Company
• Subsidiary Company
• Wholly-Owned Subsidiary
• Operating Subsidiary
  
• Holding Company
  
• State-Owned Enterprise
• Mutual Company
• Conglomerate
• What is Control of a business entity?
• What is Personal liability of owners of a business entity?
• Entity Theory
• Piercing the Corporate Veil
• What is Compensation of business owners?
• What is Taxation of a business entity?
• What is Sales & Use tax?
• What are payroll and self-employment taxes?
• What are the major characteristics of a Sole proprietorship?
• Uniform Partnership Act
• Uniform Limited Partnership Act
• Partnership Agreement
• At-Will Partnerships
• Responsibilities of Partners to the Partnership
• Silent Partner
• Funding the Partnership
• How are Partners Compensated
• Splitting Equity in an Industrial Partnership
• Terminating the Partnership
• Types of Partnerships
• What are the main characteristics of a General partnership?
• Tort Liability of General Partner
• What are the main characteristics of a Joint venture?
• What are the main characteristics of a Limited partnership?
• Family Limited Partnership
• Master Limited Partnership
• What are the main characteristics of a Limited liability partnership?
• What are the main characteristics of a Limited liability company?
• Forming an LLC
• Articles of Organization
• Operating Agreement or LLC Agreement
• Why You Need an LLC Agreement
• LLC Compensation of Members
• LLC Taxation
• Converting to an LLC
• What are the main characteristics of a Corporation
• Articles of Incorporation 
• What to include in the Articles of Incorporation
• Corporate Bylaws
• Exiting the Corporation
• Dissenter's Rights
• What are the requirements to be an S Corporation?
• Non-Profit Organization
• NonProfit Business Entities
• Private Foundation
• A Detailed Explanation of the Sole Proprietorship
• Taxation of Sole Proprietorship
• A Detailed Explanation of the General Partnership
• 50/50 Partnerships: Never a Good Idea
• Publicly-Traded Partnerships
• A Detailed Explanation of the Limited Liability Company
• A Detailed Explanation of the Corporation
• Keepwell Agreement (Letter of Comfort)
• Personal Service Corporation Definition
• A Detailed Explanation of the Non-Profit Entity
• Public Limited Company (UK)