An existing company, or parent, can create a new company as an independent subsidiary at any time with the approval of management. The startup process is the same for the company as it would be for an individual business owner. The parent controls the new company by being its sole shareholder and retaining the exclusive right to appoint the subsidiary's board of directors. Corporations are the most common type of entity that will find it useful to form a subsidiary, but it is also feasible for a limited liability company to own another business entity. Subsidiaries are formed as independent legal entities, which means they are typically organized as either corporations or LLCs.
Authorize the formation of a subsidiary. Call a meeting of the board of directors or other managing ownership of the existing company. Vote on the formation of a subsidiary and record the results of the vote in the meeting minutes. If the vote passes by a majority, draft a resolution memorializing the decision and have it signed by the chairman. Archive the meeting minutes and resolution in the company records.
Read More: How Do I Create an LLC Subsidiary?
Choose a business entity type for the new company. The subsidiary should be set up as either a corporation or an LLC, because these two entity types have independent legal status to establish separate liability for the two companies and an ownership structure that allows the existing company to hold all of the interest in the subsidiary. This decision has important tax consequences. Consult an accountant or an attorney to make the best decision.
Draft the company's formation document under state law. Choose a state in which to set up the new company. Refer to the state's business statutes for instructions to prepare articles of incorporation for a corporation or articles of organization for an LLC. Every state has similar requirements for these documents, which include selecting a unique name for the new company and indicating a business address and a registered agent to accept official mail on behalf of the company. Indicate in the articles that the existing company is the sole shareholder or owner of the new company and include a provision that prohibits the articles from being amended by anyone else.
File the formation document with the state business registrar. Most states accept new business filings through the secretary of state's office. Check the secretary's website for specific filing instructions and downloadable versions of authorized templates for articles of incorporation and organization. Include the appropriate fee with the filing. The new company comes into existence upon acceptance of the filing by the state.
Capitalize the new company. Transfer assets to the subsidiary so it can start operations. This initial transfer should be in exchange for the company's ownership interest in the subsidiary. Record the transfer in the subsidiary's accounting system by crediting the parent company's capital account.
Draft the subsidiary's bylaws. Indicate the procedure that the parent company, as the sole owner, will follow to appoint or change directors to the subsidiary's board. Prohibit changes to the bylaws without the permission of the parent company as the sole owner.
Install an initial board of directors. The board will manage the subsidiary as an independent entity. Control of the subsidiary is maintained by the parent's continued control of the composition of the board of directors. Once the board is installed, the parent has a fully functioning subsidiary.
- Journal of Accountancy: Is a Subsidiary in Your Future?
- Thompson & Thompson: Subsidiary Control and Liability Issues
- ASAE -- The Center for Association Leadership: Establishing and Operating Taxable Subsidiaries
- Los Angeles County Bar Association Business Law Update: Choice of Entity for a New Subsidiary of an S Corporation
- FindLaw: Writing and Filing the Articles of Incorporation
- Citizen Media Law Project: Limited Liability Company
Terry Masters has been writing for law firms, corporations and nonprofit organizations since 1995, specializing in business topics, personal finance, taxation, nonprofit issues, and general legal and marketing content creation for the Internet. Terry holds a Juris Doctor and a Bachelor of Science in business administration with a minor in finance.