I am writing this post about parent and subsidiary ownership because of a question that I answered recently on Quora and a similar question that a prospective client posed to me. (Please see Can an LLC allocate ownership to individuals on a per investment basis (vs at the LLC level)?)
I always have thought that parent and subsidiary ownership were straightforward. However, that apparently is not the case for everyone. I will use an example to explain this concept. (I will refer to corporations. This discussion can apply equally to other types of entities, such as limited liability companies.)
Let’s assume that Jane holds 80% of the shares of Parent Corp., and Joe holds 20% of the shares.
Parent and Subsidiary Question
Here are a question that founders sometimes ask and my answer to that question.
Q. How do we ensure that Jane owns 80% of Parent’s subsidiary, Subsidiary Corp,., and Joe owns 20% of Subsidiary Corp.?
A. You don’t!
Definition of Parent and Subsidiary
The definition of a parent and subsidiary relationship is that the parent owns (holds the shares of) the subsidiary. (To simplify, I will assume that Parent holds 100% of Subsidiary’s shares. The term “subsidiary” can apply to less than 100% ownership.)
The fact that Jane owns 80% of Parent and Joe owns 20% of Parent is irrelevant.
Because they are shareholders of Parent, Jane (especially) and Joe (to a lesser extent) have some influence over Parent’s board of directors. And Parent’s board, in turn, will have some degree of control over Subsidiary.
But that is the extent of Jane and Joe’s influence over Subsidiary. They are not owners of Subsidiary.
Dana H. Shultz, Attorney at Law +1 510-547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.