People throw around the term ‘subsidiary’ in business. Google, for example, recently made headlines when it was announced that its parent company, Alphabet Inc., is breaking into subsidiaries. It’s understandable that you might not be exactly clear on what it means. Subsidiaries are important but often fail to get the attention they deserve. Business and law school professors often breeze past the basic building blocks of law and of business, giving Limited Liability Companies and subsidiaries a cursory glance at best.
What is a Subsidiary?
A subsidiary company is just another word for child company. A “parent” company can have lots of baby companies. Subsidiaries are powerful tools. They allow for firewalls of protection between assets and business lines. Subsidiaries are often separately-filed LLCs. Between state annual franchise taxes and annual registered agent fees, the cost starts at about $400 per year per LLC.
Having subsidiaries helps companies compartmentalize liability risks to keep creditors away from the other valuable assets. For example, one of the subsidiaries may file for bankruptcy without having the rest of the business go through the process. A subsidiary also lets you bring in new members to your new venture without giving them a slice of the bigger “pie” from sectors of the parent company the have no involvement with.
How are LLCs and Subsidiary Companies Related?
LLCs are straightforward compared to the interesting stories of internal conflict that make up the cases law professors use to teach corporations. A single private contract called an Operating Agreement controls an LLC. This governing document between owners sets forth the ownership and management structure. The members are the owners of the LLC. The agreement functions predictably and the members can amend it at any time as the needs of the business and its owners change. Times have changed. Those simple structures have become the groundwork of today’s business world.
LLCs are now the most popular new business type, representing three quarters of new businesses formed. Many of these new LLCs are subsidiaries, and not just for big businesses. Many small businesses also have wholly owned parent-child subsidiaries.
How to Create a Subsidiary
First, you need to form a single-member LLC whose single member is the parent company. Subs are popular because they are super easy to administer. The IRS disregards single-member LLCs for tax purposes because they do not need to file separate tax returns. All the profits and losses for accounting purpose show up on the parent company’s books.
That’s what Google is doing with the new Alphabet, Inc. To separate out its business lines from the search engine cash cow, the goose that laid the golden egg has “dropped down” into a subsidiary under its new parent company, Alphabet. Some of Google’s ideas are goose eggs – zero profits…so far. For example, remember Google Glass? The goal is for Alphabet to keep laying golden eggs.
Why Form a Subsidiary?
If one “egg” becomes rotten because of toxic liabilities, compartmentalizing those risks in a subsidiary LLC will help isolate those newfound creditors to only the exposed toxic assets that caused the harm. The objective is to avoid punishing the other subsidiaries that did not do any harm to the creditor.
Today, Google is the most recognized Delaware limited liability company in the world. It’s unknown how many subsidiaries Alphabet has incubating, but its likely in the hundreds. You’re probably aware of some other well-known companies, like General Motors, which has about 1,500 subsidiaries in Delaware. Entrepreneurs form thousands of Delaware LLC subsidiaries every month, each with discrete purposes and assets of their own. The flexibility of LLCs and the proliferation of subsidiaries allow new possibilities in asset protection. If you’re not one of the thousands who already have, consider forming a Delaware LLC with LLC subsidiaries and reap the economic benefits that Google, Alphabet, and many other companies have identified.