How to Create a Subsidiary Under an S Corporation

A subsidiary is a company that another company owns at least 50 percent of its shares in ownership. While a corporation cannot own stock in an S Corporation, an S Corporation can own stock in other companies. In order to form a subsidiary under an S Corporation, the S Corporation must own at least 50 percent of the subsidiary's stock. A subsidiary allows the company to expand into other lines of work and not risk adverse financial statement impacts due to the new line of work. Companies also use subsidiaries as a means to separate different types of work.

Instructions

1. Determine the type of business entity you want the subsidiary to be. The options differ based on your state, but the most common forms are some form of corporation, such as a C corporation or a limited liability company.

2. Form the business entity with the Secretary of State where you are forming the business entity.

3. Transfer at least 50 percent ownership from the newly formed company to the S Corporation.

References

• Investopedia: Subsidiary Definition
• IRS: Form 8869
• NYSSCPA: Recent Reform and Simplifications for S Corporations