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.
Recently I was engaged in a Facebook exchange among a group of successful business women. Someone asked for opinions on using Grammarly—an app that is marketed as “A FREE, ACCURATE GRAMMAR CHECKER BUILT FOR EVERYONE.”
The comments started rolling in: “love it!” “best thing I have used in a long time.” “Cuts my writing time significantly.” And more like that.
I actually had installed the free app a few weeks before to give it a test run. I found it to be a nuisance because that little app was popping up and sticking its grammar-nose in every single thing I wrote. My emails. My blog posts. My word documents. That spelled danger to me, and I immediately deleted it.
My curiosity piqued, I checked the Terms of Service (which, admittedly, I should have done first). Here is what I found:
By uploading or entering any User Content, you give Grammarly (and those it works with) a nonexclusive, worldwide, royalty-free and fully-paid, transferable and sublicensable, perpetual, and irrevocable license to copy, store and use your User Content (and, if you are an Authorized User, your Enterprise Subscriber’s User Content) in connection with the provision of the Software and the Services and to improve the algorithms underlying the Software and the Services. (emphasis added)
Here's what you need to know:
What does this mean for you?
It means that if you install Grammarly, whether it’s a free service or a paid service, you are specifically giving an unlimited perpetual license to your content to Grammarly and any company they affiliate with and any of their subsidiaries basically for any service they provide now and decide to use in the future.
That means that if you use Grammarly, instead of your own brain or a copy editor, you are no longer the exclusive owner of your content. That means they can republish, provide to third party affiliates, and use your data and materials any way they see fit.
The bottom line is that Grammarly has access to—and the unlimited, forever—right to use your content. Period.
And, once you install Grammarly, it is everywhere . It pops up in every document you create. Every. Single. One. If you don’t believe me, try it yourself.
Of course, lawyers and other professionals with a confidentiality responsibility to their clients are ethically prohibited from using Grammarly. (And, I hope they read the fine print.) But even if you don’t have an ethical responsibility to keep information confidential, do you really want to give up the right to your content?
Think about it! And next time, read the fine print. … or call me, and I’ll read it for you.
*This post has been updated here
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.