What is a parent company? How does it affect the subsidiary? A parent company is the basis for small subsidiaries. It performs important functions in relation to them, forms the foundation on the basis of which subsidiaries are developed. For example, a loan to a parent company subsidiary. In the article we will try to analyze in detail the definition of these two concepts and the relationship between them. We wish you a productive reading of the text!
Definition of parent company
A parent company is a connecting and coordinating organization that has under its control one or more subsidiaries. In other words, it is a holding company that holds shares and all rights to these small enterprises.
In the modern world, companies are trying to unite in a single system in order to achieve their goals. For example, the capture and development of new commercial areas of the international market. However, for the functioning of the holding system, a parent company is required - it is a management organization that controls all the processes and actions of its subordinate firms.
The concept of a subsidiary
The term "subsidiary" means both partnerships and firms that are under the coordination and control of a management company. It is created to find important and financially profitable areas, which subsequently turn into specialized organizations. This, accordingly, will increase the competitiveness of the entire holding in the international market.
The advantage of creating a subsidiary abroad provides an opportunity for the development and improvement of foreign economic relations. However, it is important to join the parent company.
The main functions of the parent company
Of course, the parent company, when it takes control of small firms, has some functions in relation to them.
There are four of them:
1. Creating a business package.
First of all, this includes the preparation and detailed development of a plan for the development prospects of subsidiaries, the purchase or sale of securities (assets), the structural organization of enterprises, the processing and approval of business plans, capital and investment control.
2. Improving the productivity of the business package.
The parent company should not only select employees (managers), but also create all the necessary conditions for their effective work, that is, motivate them. Also form programs that would improve the activities of firms, their functional management and mutual assistance.
3. Capital management.
All financial issues are monitored: income and expenses.
4. Control of external interactions with other shareholders and companies.
Responsibility
In general, subsidiaries are independent. In the event of the formation of debts, they are obliged to pay them themselves, however, at their own request, the main business company may receive financial assistance from the parent company.
There are two situations when a holding is responsible for paying debts:
1. An agreement is signed with other enterprises with the participation of a subsidiary at the request of the management company. In this case, when critical situations arise, both companies are required to pay the debt.
2. A subsidiary company went bankrupt due to parent activities. In this situation, when the subordinate company does not have enough funds to repay the loan, the main company must pay it. In this case, there is a guarantee of the parent company.
Control
The management of the holding system takes place through fees of directors and executive employees. However, the regulation of the entire organization is concentrated in the hands of a group of shareholders.
Management necessarily includes: advertising, the implementation of a business plan, control of the finances of all incoming companies in the holding, reporting of the parent company and subsidiaries throughout the work for a certain time.
The manual can be divided into several levels:
- Syndicate.
- Cartel.
- Concern.
We will talk about each method in more detail in separate sections.
Syndicate
What is a syndicate? And how does he feel about the parent company? A parent company is a kind of holding company that can go to different levels of management of the entire system.
A syndicate is a type of united company, the management of which is based on the conclusion of an agreement between companies that specialize in a particular industry in the industrial sector, as well as selling products and purchasing the necessary raw materials to increase income.
A distinctive feature of the syndicate is the loss of commercial independence, however, while legally and production firms remain free. All trading activities are carried out through a sales office, which purchases goods from enterprises at a predetermined price. Moreover, this organization is able to purchase raw materials for the syndicate at fairly low prices. All activity is done exclusively.
Cartel
Cartels are resorted to by companies for commercial activities. In other words, it is an agreement that creates equal provisions for all its participants, such as volume of production, value setting, and so on. Management takes place through meetings and gatherings of firms at which important issues related to trade are discussed and resolved. In the cartel, each of its members remains independent in all aspects.
Concern
The concern, like the aforementioned forms of associations, is a large-scale agreement between enterprises to increase competitiveness. Its main goal is the formation of large-scale production on the basis of several factories or plants. In this case, firms have a management company, which most often exercises control over the financial side.
Advantages and disadvantages of holding
The holding, as explained above, consists of a parent company and subsidiaries. As with any system, there are certain advantages and disadvantages.
Let's start with the pros:
- The base of resources and suppliers is expanding, the ability to attract new, more qualified personnel.
- Increasing competitiveness in the foreign market and reducing competition in the domestic, as companies are involved in one system.
- The ability to sell better products on the international market.
- Creation of new opportunities, such as the introduction of the latest technical developments, the exchange of production experience and so on.
- Focusing on making high profits.
- Attracting more customers.
- Control of all processes by the main company.
- Formation of the image of an influential and competitive association.
- Ability to resell subsidiaries.
- Companies in the holding can reduce industrial risks, as well as create all conditions for the qualification preparation of separate types of activities.
In fact, this is an incomplete list of all the advantages that a holding corporation has.
However, there are some disadvantages of such a combination of companies:
- If at least minimal competition is absent inside the holding, this can lead to a decrease in the economic level.
- Bureaucratic management structure.
- There is no single taxation of all subsidiaries.
- There are also some difficulties in managing the corporation. For example, there is no normal legal coordination. Each subsidiary has its own interests, which can be very different from others. Fairly high level of costs and so on.
Summing up, it is worth highlighting that subsidiaries are independent in the legal sense. However, financially they depend on the main company. If a debt situation arises, the subsidiary is obliged to pay it itself or may borrow from the management.
However, in difficult circumstances, it is possible for a subordinate company to forgive the debt of the parent company. Holding is, on the one hand, a profitable association system to create a better product and increase its level of implementation on the international market. But on the other hand, it is difficult to manage and control such a huge system.