How to Form a Subsidiary Corporation
Assume that the fictitious corporation "XYZ Corp" is looking to branch out into new areas of business. A concern the board has is reducing its exposure to risk should the new business venture fail. One way to reduce risk in a new business venture is to create a subsidiary corporation. In a parent-subsidiary relationship, the parent company owns at least 50 percent of the subsidiary company. The parent company can control subsidiary operations, but it is only liable for the business to the extent of its investment into the new business.
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Instructions
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Meet with management to discuss the administrative details of the subsidiary. Before forming the subsidiary, you must determine why you want to form it, what assets of the parent company need to be transferred over to the subsidiary once it is created and the accounting system of the new company.
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File articles of incorporation for the subsidiary company. This document formally creates the subsidiary company as a new corporation within the state.
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Comply with corporate formalities for your subsidiary company. The new company must have its own set of bylaws, its own board of directors and it must issue shares to the shareholders. In order to complete the parent-subsidiary relationship, at least 50 percent of the new company must be issued to the existing, parent company.
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Transfer assets into the name of the subsidiary corporation. For example, assume the XYZ Corporation created a subsidiary to handle its florist operations. XYZ Corp. would transfer any assets owned in XYZ's name that were related to the florist operation into the name of the subsidiary so that the subsidiary is properly funded and can operate.
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Set up the books for the new subsidiary corporation. Work with your accounting team to create a separate accounting system including separate balance sheets, income statements and other financial documents.
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Tips & Warnings
Corporate formalities such as regular meetings and quarterly tax filings must be done by the subsidiary company. If the parent company fails to adhere by these rules, courts may not treat the subsidiary as a separate legal entity from the parent company.
