Affiliate is a company that is controlled by another company through a parent-child relationship. A company is only said to be a subsidiary company if the parent company has a majority stake by owning more than 50% of the issued share capital. A Subsidiary alone may have subsidiaries. Subsidiaries are considered separate legal entities for tax and regulatory purposes.
Types of subsidiaries – Three types of Subsidiaries can be formed, namely:
-Limited Public Liability
-Minimum capital – Must be paid by the founders (minimum two members)
-Shares – You can issue registered or bearer shares
-Management – Must have at least three directors. A director must be a permanent resident of the country.
-Private Limited Liability
-Minimum Capital – Must be paid by the founders
-Shares – Shares must be nominative. Bearer shares cannot be subscribed
-Management – Managed by one or more managers
-Cooperative limited liability company
-Minimum Capital – Three partners are needed. A quarter of the capital contribution must be paid
-Shares – The shares are nominative
-Management: a cooperative company with limited liability and managed by one or more managers
Parent – Subsidiary Relationship
It is important that the subsidiary be recognized as an independent corporation managed by the board of directors even though it has been incorporated by the parent company. This does not mean that the subsidiary is not controlled. The parent company has the legal authority to hold the subsidiary accountable for meeting financial targets.
For the parent to control the independent subsidiary, it must be:
-The sole shareholder
-Include vote control provisions in subsidiary article
-Prepare statutes that define the authority of officials, their duration in office and removal
-Prohibit the modification of the bylaws without the approval of the shareholders
Legal Risks
As long as the parent company holds its subsidiary accountable to the expectations of its board, there is little risk that the parent company will be held liable for the subsidiary’s wrongdoing. But, if the parent company exercises excessive control, for example, has the same board of directors, use of common letterhead, then the parent company and the subsidiary are treated as one and the parent company is liable for the debts of subsidiaries, etc
Advantages and disadvantages of the subsidiary
Advantages
– Considerable tax advantages and legal protections
-Ability to offset the gains and losses of one part of a business with another
-Some countries allow subsidiaries to file tax returns on profits earned in that country
-Liabilities and credit rights are locked in that subsidiary and cannot be transferred to the parent company
-Allows joint ventures with other companies, each of which owns a part of the new business operation.
Disadvantages
-The legal paperwork involved in setting up a subsidiary can be lengthy and expensive
-Control also becomes an issue when a subsidiary is partially owned by another outside organization.
