One of the ways to expand your small business that reaps huge benefits, while minimizing risks, is by adding a subsidiary.A parent–subsidiary structure provides liability protection, tax benefits, and facilitates future business plans. It could be the best next step for you.
A subsidiary is a legally separated business that is fully owned, and controlled by another company, usually referred to as the "parent" company. The parent company is the sole shareholder, or owner, of the subsidiary company.
Legal protection and tax benefits are two good reasons to create a subsidiary. Other reasons, more fully developed below, include using a subsidiary to penetrate a market or launch a product line. Sometimes it is a smart vehicle for focused development on one specific, segregated aspect of the business, but not all of it. There may also be future plans of selling a portion of the business, or distributing different segments of the company among family members. Or, the company may have a higher risk of being sued, due to the nature of the business, and operating part of the business via a subsidiary can minimize that risk. All of these instances may justify the creation of a subsidiary.There are costs involved in the creation of a subsidiary, so it is typically best to do so only when those costs are minimal as compared with the resulting tax relief and other benefits.
A subsidiary operates independently while being under the control of the parent company. As a separate entity, the subsidiary has its own board of directors and officers that manage the day-to-day operations. But, the parent company has the power to modify the board at any given time, due to the fact that it’s the only stockholder, which effectively gives it control.
By being a separate entity from its parent, a subsidiary can be taxed, regulated, and held liable individually. That’s what makes subsidiaries such an interesting option for growing companies.The subsidiary is accountable to its parent company. The parent company has the legal right to have access to the subsidiary’s business plans and financial data, in order to regulate its progress, and protect the interests of the subsidiary and the parent company.
One of the main advantages of creating a subsidiary is the possibility to test new markets or new product lines without jeopardizing the assets and credit record of the parent company.
In the same line of thought, if that new product line or market isn’t as profitable as expected, having a subsidiary facilitates the selling of that portion of the company. And, if it is necessary for the subsidiary to seek creditor relief under the bankruptcy laws, its creditors wouldn’t be able to go after the parent company’s assets.
Now, let’s consider the opposite (and more positive) scenario, in which the subsidiary actually becomes profitable for the parent company. The parent then starts to receive dividends from the subsidiary, which can be used to fund the parent company and facilitate parent company growth.
Another advantage of the parent-subsidiary structure is the possibility of having local management teams instead of a centralized management structure. This allows the parent to have better control over the subsidiary day-to-day operations such as hiring personnel, credit options, and marketing decisions, and facilitates the implementation of corporate-wide procedures and strategies.
And finally, the main reason companies consider creating a subsidiary is the tax benefits derived from its structure. When filing federal income tax returns, the parent company can file a consolidated tax return, and include profits and losses from the parent company, as well as its subsidiaries. That way, total profits of the parent can be offset by the total losses, and the company pays less in federal income taxes.Also, some states allow subsidiaries to file tax returns only on the profits generated within that specific state, and not those generated in other locations. The same may be applicable for the profits of international subsidiaries, which will not pay income taxes in the U.S. but might do so at a significantly lower rate in the country where they’re located. In case of international subsidiaries, however, caution is warranted because regulations regarding taxation of parent-subsidiary foreign income can change rapidly.
You will, of course, want to be guided by an experienced CPA, attorney, and business advisor, but once the decision is made, creating a subsidiary is not complicated. Basically, the steps are:
---Having a subsidiary can bring many benefits to the parent company. It’s the best way to test the waters on new lines of business, new locations, and generate revenue while preventing possible legal liabilities, and financial damage. If you’ve been incubating several new ideas but aren’t sure of their marketability, maybe it's time to consider dipping your toe in the water by launching a subsidiary.
The driverless car industry is hot and super-competitive. That’s a given. Here’s what’s not hot if you are Waymo, the self-driving car business that was spun out of Google’s parent company:
Recently, there was a trademark spat between Adidas and Tesla. The story piqued my interest because the big players make mistakes that are instructive for small businesses (only on a grander scale)—and because it illustrates the importance of brand identity and underscores why it’s smart to register your mark.In a nutshell, here’s what happened: Tesla filed with the US Patent and Trademark Office (USPTO) to register its Model 3, three-bar logo as a trademark. If the registration had been for the purpose of using the mark on a car, there would not have been a problem. BUT, Tesla registered to use its three-bar “E” on clothing. Adidas, a company known for rigorous policing of its brand identity, challenged Tesla’s right to register the mark as confusingly similar to the Adidas three-bar logo. Tesla withdrew its application. Adidas protected its three-bar brand identity.
The Trans-Pacific Partnership (TPP) is the largest regional trade agreement in history, between the United States and 11 other Pacific Rim countries. Following in the footsteps of the North American Free Trade Agreement (NAFTA) between the US, Mexico, and Canada, the TPP expands upon this to establish new rules for global trade by eliminating 18,000 tariffs, promoting an open internet, disciplining state-owned enterprises, and establishing environmental and worker protection. Its aim is to increase Made-In-America exports, grow the US economy, support higher-paying US jobs, and strengthen the middle class.
You've probably heard references to the TPP in recent campaign coverage. It is the result of years of trade negotiations, and has been hailed as a hallmark victory for the Obama administration. However, the agreement is still in limbo, pending ratification by Congress--a delay that hardly comes as a surprise. And, both presidential candidates for the major parties have come out against the TPP. Given this, the future of the TPP is up in the air.
Supporters hope for a vote during the lame-duck session, but the TPP's passage could very likely depend on the next presidential administration. In the meantime, we are left to consider the implications of passage of this agreement, as well as its impact on NAFTA, a pre-existing trade agreement of a similar nature.
The TPP is a piece of legislation I have been closely following, and recently had the opportunity to moderate a panel entitled, "The Impact of TPP on NAFTA: Opportunity for Strengthening Ties -- Or Recipe for Disaster." Panel members included Aristeo Lopez of the Mexican Embassy, Laura Sierra of Alston & Bird, Nicholas Guzman of Drinker, Biddle & Reath, and Greg Kanargelidis of Blake, Cassels & Graydon.
The American Bar Association Section of International sponsored this event with the intention of presenting US, Mexican, and Canadian standpoints on the TPP and the impact of its passage on NAFTA. What followed was a thoughtful and informative discussion, and although the topic is highly complex, I thought I'd share some highlights with you.
Ms. Sierra explained some of the political context surrounding the TPP, including that the US has historically been pro-trade, and this is the first time since 1992 that trade has been a significant issue in presidential election year politics. US FTAs are modeled after NAFTA. The agreement eliminates a significant number of tariffs that would be beneficial to US businesses, but there are dissenting voices. Some of the concerns include employment issues, the manipulation of currencies by various countries, and opposition in specific industries such as auto, segments of agriculture and pharmaceuticals and biologics whose concerns were not addressed in the agreement. For example, intellectual property protection for biologics is not included in the agreement.
Mr. Lopez pointed out the benefits of NAFTA--growth in trade between Mexico and the US, especially--and explained that the TPP is intended to expand upon this growth, with attention to subjects that were treated less comprehensively in NAFTA. Another goal of TPP, in Mr. Lopez' view, is to strengthen Mexico's ties to NAFTA and other FTA partners, allowing Mexican goods to reach new markets.
Mr. Kanargelidis noted that the TPP is not intended to replace or override NAFTA, but that the two agreements can co-exist. He pointed out US, Mexican, and Canadian businesses can operate under the clauses of whichever agreement is most favorable to them in a given transaction. For example, the "de minimis" value threshold is 10% under TPP, and only 7% under NAFTA.
An audience member posed the question of whether TPP shipments will be exempt from US Merchandise Processing Fees (MPF) like NAFTA shipments are. Mr. Guzman explained that even though TPP does away with "ad valorem" fees, US Customs might find another way to collect MPF that is compliant with the agreement. He also described the TPP's "focused value" methodology for determining goods' origin, which might be more stringent than NAFTA methods.
Opponents to the TPP often cite concerns about the Investor-State Dispute Settlement (ISDS) provision, which outlines the mechanism by which agreement disputes can be settled. Mr. Lopez explained that the TPP’s ISDS provisions are more transparent than those found in NAFTA.
At the conclusion of the panel, Ms. Sierra suggested that a full renegotiation of the TPP is unlikely, given that the agreement was difficult to reach in the first place, and that several countries have already ratified it. However, we might see some side letters that result in alterations to the text pertaining to certain issues. Panelists agreed that the TPP will pass. It’s a matter of time and final form.
The TPP has been negotiated between 12 countries who together form about 40% of GDP, and 1/3 of world trade. The agreement is of an unprecedented scope, and the implications of this agreement are huge. We will soon know if it can pass during the lame-duck session before the election, which is fast approaching!
Granville, Kevin. “The Trans-Pacific Partnership, Explained.” The New York Times. 20 August 2016. Web.“The Trans-Pacific Partnership.” Office of the United States Trade Representative. Executive Office of the President. 2016. Web.
In July, we reviewed the Defend Trade Secrets Act (DTSA) that passed in Congress by a sweeping majority, and was signed into law by President Obama on May 11—a rare piece of legislation that was largely agreed upon on both sides of the aisle!
In this post, “Trade Secrets: Part Two,” I want to emphasize the importance of understanding what a trade secret is, regardless of whether it is under the DTSA or state law. Surprisingly, many businesses I work with rely heavily on trade secrets for their economic livelihood, and they don’t know it. Not knowing and not tending to that little gold mine of yours can mean a significant financial hit to your business in many ways, not the least of which is losing your competitive advantage.
So, what are the components of a trade secret, and how do you protect it? Think of it in threes: the three key elements of a trade secret and three steps to protect it.