Subsidiaries and Sister Companies

Subsidiaries and sister companies are among the most important organizational structures of large companies. They play a vital role in expanding business, diversifying investments, and enhancing operational efficiency.

In this article, we will discuss in detail the concept of both subsidiaries and affiliated companies, the difference between them, their importance, and how to establish and manage them.

Definition of subsidiaries

A subsidiary is a company that is controlled by another company with more than 50% voting shares, it is usually referred to as the mother company or holding company. A subsidiary is partially or wholly owned by the mother company that owns a controlling interest in the subsidiary.

If the mother company owns a foreign subsidiary, the subsidiary shall follow the laws of the country in which it was established and operated in, and the mother company prepare financial statements combined with all subsidiaries.

The mother company owns the majority of the subsidiary’s voting shares, giving it the ability to control the subsidiary’s operations and strategic decisions. Subsidiaries are separate legal entities from their mother companies, meaning they have their own management, financial, and legal responsibilities.

Reasons for establishing subsidiaries:

Subsidiaries can be formed for various reasons, such as expanding in new markets, diversifying commercial activities, or separating certain business operations. They often operate in different geographic locations or industries, allowing the mother company to have a presence in multiple markets or sectors.

Types of subsidiaries:

Here are some common types of subsidiaries:

1- A wholly owned subsidiary

A wholly owned subsidiary is a company in which the mother company owns 100% of the subsidiary’s shares. The mother company has complete control over the subsidiary’s operations and can consolidate its financial statements with those of the mother company.

2- Majority owned subsidiary

In a majority-owned subsidiary, the mother company owns more than 50% but less than 100% of the subsidiary’s shares. The mother company has a controlling interest and can exercise significant influence over the subsidiary’s operations and decision-making.

3- Joint project

A joint venture is a subsidiary formed through a partnership between two or more companies. Each company contributes capital, resources, and expertise to the joint venture, and shares ownership, control, and profits according to the terms of the Joint Venture Agreement.

What are Sister Companies?

Also known as sister corporations, are separate legal entities that share the same mother company or have a common mother company. Unlike subsidiaries, affiliates do not have a direct ownership relationship with each other. Instead, they are linked through a common mother company.

Sister companies may operate in the same or different industries and may cooperate or compete with each other based on their business goals and strategies. While they may have some degree of coordination or synergy due to their common ownership, they retain their own separate legal identities and are typically managed separately.

What is the difference between Subsidiaries and Sister Companies?

The difference between subsidiaries and the sister companies is in their relationship with the mother company, and in their relationship with each other.
A mother company is a company that owns separate companies known as subsidiaries. Its control comes either from its ownership of the subsidiary or from its controlling interest in the shares of the company. Sometimes a mother company creates subsidiaries to divide its business, and while the mother company is usually larger than any of its subsidiaries, it does not necessarily have to be.

A subsidiary operates as a separate legal entity rather than as a separate company from its mother company, so subsidiaries are sometimes referred to as a subsidiary. Subsidiaries also have the ability to control their interest in other subsidiaries. One advantage of companies that have control over subsidiaries is that the mother company has the right to file a consolidated tax return. A mother company presents consolidated financial statements with its subsidiaries.

A sister company is a subsidiary of the mother company by virtue of its ownership. Each affiliate is independent of the other sister companies, and the only possible relationship between them is that of the mother company.

A sister company may produce a range of products that are different from each other or from the mother company itself. Sometimes sister companies compete with each other, although they may have agreements to exchange information and set special prices. When a sister company has a common target market, it can reap the benefits of reducing costs through joint marketing materials and advertising.

Characteristics of Sister Companies:

1- Joint mother company

Sister companies have a common mother company that has ownership or controlling shares in both entities. The mother company may own a majority or minority shares in each sister company, or it may have equal ownership in both.

2- Independence and separate management

The sister companies operate as separate legal entities with their own management teams, finances, and governance structures. Each sister company is responsible for its own operations, strategic decisions, and compliance with applicable laws and regulations.

3- Potential cooperation or competition

Sister companies may cooperate and share resources, knowledge, or technologies to achieve common goals or create synergies. However, they may also compete with each other in the market if they operate in the same industry or offer similar products or services.

The difference between sister companies and subsidiaries

1. They are small or startup companies, in which ownership of more than 20% and up to 50% of their shares is subject to another company.
2. The invested company has the right to participate in the decisions of the sister company, but the participation is limited and non-binding, as the sister company can accept or reject this intervention (due to the acquisition percentage of less than 50%).
3. The annual outcomes of the sister company are completely separate from the outcomes of the investing company.
4. The purpose of companies purchasing shares in sister companies is to expand the production of a good or service or to target a specific brand that is likely to achieve a large profit in the future.

As for subsidiaries

1. It is a company wholly owned or partially controlled by another company and is called the mother company.
2. The ownership of more than 51% to 100% of its shares is subject to another company (the mother company).
3. The mother company (investor) has the right to interfere in the financial and administrative policies of the subsidiary.
4. However, the subsidiary enjoys independence from the investing company in all matters related to its tax obligations and governance.
5. At the end of each year, the annual business outcomes of the subsidiary are combined into the consolidated business outcomes of the investing company.
6. Subsidiaries are a good way for companies wishing to diversify their corporate identity without compromising their main identity.