Understanding the Differences Between Branch and Subsidiary Corporation
Business owners start their businesses to earn a profit. And when the businesses are successful in reaching this goal, they push boundaries to not just settle at that. To look for more avenues to earn, businesses expand to cater to their growth. The branch and subsidiary corporation are both ways to expand businesses.
This article discusses the concept of branch and subsidiary corporations. Here, we talk in detail about how a branch is different from a subsidiary.
Branch and Subsidiary Corporation Defined
The branch corporation is simply an extension of a business in another location. It is a secondary establishment made in another place to expand the reach of their products or services. You usually branch out to explore a new market and increase the physical presence of your business in another place.
For example, you realized that more people from the next city are coming over to eat in your local restaurant. To handle this increase in customers, you could establish the same restaurant in the next city.
On the other hand, a subsidiary corporation is a company dominantly owned and controlled by a single person or corporation. The two companies are initially two separate companies. After a process of buying more than 50% of the shares of the other company, the buying company becomes a parent company, and the other the subsidiary company. Because of the number of shares bought, the parent company has voting and controlling powers over the subsidiary company.
For instance, a clothing company has a new competitor who threatens its standing as the top cloth producer. So the top company buys 80% of the shares of this competitor company. The top company is now the owner of 80% of the competitor company and now has the power to control its management decisions.
Subsidiary companies may be of the same field as the parent company. This happens when the parent company wants to reduce competition in the field. Further, it can also be of a different industry entirely. This is usually done for investment diversification purposes. The company wants to ensure that if their investment in one sector fails, its losses are lessened by the success of another sector.
Differences Between Branch and Subsidiary Corporation
The branch corporation is technically still part of the home office, so they share the same organization rules. Usually, the location of the branch is so far from the home office that they assign a branch manager to handle the branch’s operation. However, the branch manager will still follow the direction of the general manager from the home office.
In contrast, the subsidiary corporation generally has different rules with the parent company. After the purchase of stocks, both companies still keep their independent identities. Thus, they operate separately with different strategies. However, the subsidiary is still under the control of the parent. Therefore, if it makes changes or takes on new projects, these will be subject to the parent’s consent.
Each branch usually has accounting records of their own. However, the income and expenses of the branches are added together in the accounting of the company’s books. Thus, there is only one financial statement for the whole company.
Subsidiaries, as an independent company, record their transactions separately. Therefore, the subsidiary will have its own set of financial reports separate from that of the parent. Each will have its own accounting reports.
However, the law requires combining of their separate financial statements. Because in the eyes of the law, the subsidiary and the parent is a single entity. So at each period, both companies combine their assets, liabilities, income, and expenses to make it look like there is only one company.
Considering Investment Decisions
Investing in branch and subsidiary corporation will have its own set of advantages and disadvantages. The branch and subsidiary corporation will have its complexities and ease that you would want to consider.
Do you need professional advice on which direction to move? 3E Accounting is here to help. We specialize in Philippine company registration services. We can consult you on which investment to take and assist you in seeing this through. Contact 3E Accounting to contract our services today.