A daughter company - is its establishment profitable?

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The concept of a daughter company (subsidiary) may be associated primarily with a certain degree of dependence on the parent company, the so-called the parent company (parent company) not only in terms of strictly economic or corporate, but also in terms of similarity in the conducted activity. The profitability of establishing a daughter company depends primarily on the market on which such companies operate, its wealth, development opportunities or the subject of activity. In this article, we will explain how the daughter company operates.

A daughter company as a subsidiary

According to the glossary of terms contained in the Commercial Companies Code (hereinafter referred to as the Commercial Companies Code), a company is considered a parent company if the parent company of a subsidiary:

a) holds directly or indirectly the majority of votes at the shareholders' meeting or general meeting, also as a pledgee or usufructuary, or on the management board of another capital company (subsidiary), also on the basis of agreements with other persons

or

b) is entitled to appoint or dismiss the majority of members of the management board of another capital company (subsidiary) or cooperative (dependent cooperative), also on the basis of agreements with other persons

or

c) is entitled to appoint or dismiss the majority of members of the supervisory board of another capital company (subsidiary) or cooperative (dependent cooperative), also on the basis of agreements with other persons

or

d) members of its management board constitute more than half of the members of the management board of another capital company (subsidiary) or cooperative (dependent cooperative)

or

e) holds, directly or indirectly, the majority of votes in a subsidiary partnership or at the general meeting of a dependent cooperative, also on the basis of agreements with other persons

or

f) has a decisive influence on the activities of a subsidiary company or a dependent cooperative, in particular on the basis of the agreements referred to in Art. 7 of the Commercial Companies Code.

Example 1.

The company ABC Sp. z o.o. (parent company), the object of which is the production of steel construction elements, decided to pass a resolution on the establishment of a company whose object of activity will be road transport. The newly created company was named XYZ Sp. z o.o. The sole shareholder of the company is ABC Sp. z o.o. Thus, XYZ Sp. z o.o. is a subsidiary, i.e. a daughter company.

Also in the Accounting Act in Art. 3 sec. 1 point 37, the legislator defines the parent company (parent company) as an entity being a commercial company or a state-owned enterprise, exercising control over a subsidiary, in particular:

a) having a direct or indirect majority of the total number of votes in the governing body of the subsidiary, also on the basis of agreements with other voting rights exercising voting rights in accordance with the will of the parent company

or

b) being a shareholder of a subsidiary and authorized to manage the financial and operating policy of that subsidiary independently or by persons or entities designated by them on the basis of an agreement concluded with other entitled to vote, holding under the articles of association or articles of association, including the parent company , the majority of the total number of votes in a decision making body

or

c) being a shareholder of a subsidiary and authorized to appoint and remove the majority of members of the management, supervisory or administrative bodies of that subsidiary

or

d) being a shareholder of a subsidiary, the members of which more than half of the management, supervisory or administrative bodies in the previous financial year during the current financial year and until the financial statements for the current financial year are prepared are persons appointed to perform these functions as a result of the parent undertaking's performance voting rights in the governing bodies of this subsidiary, unless another entity or person has the rights referred to in point (a) in relation to this subsidiary. a, c or e

or

e) being a shareholder of a subsidiary and entitled to manage the financial and operating policy of that subsidiary, on the basis of an agreement concluded with that subsidiary or the articles of association or agreement of that subsidiary.

A similar definition of a parent entity can also be found in the Act on Competition and Consumer Protection.

The daughter company in terms of organization, law and tax is a separate economic entity from the parent company.

Advantages of establishing a daughter company

The advantages of establishing a daughter company can be divided into several aspects:

1) increasing market competitiveness

First of all, it is about issues related to increasing access to potential customers. It may also entail entrusting a daughter company with a business activity different from that of the parent company, which in turn results in entering new markets.

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2) development of the conducted activity

The development of the conducted activity is connected with the daughter company's entry into potentially new markets or expansion of the activity on the market on which it currently operates. In addition, the development also works in terms of marketing and gives the impression that the parent company is developing by implementing new projects and is open, for example, to new technologies.

3) expansion of the corporate structure

Establishing a daughter company causes that the parent company sheds a certain burden of responsibility for the conducted activity. This results in a certain fragmentation of activities, however, in the corporate structure, the parent company is the highest in the hierarchy, which in turn causes it to have an impact on the activities of subsidiaries (companies).

4) increasing the level of credibility in the market

One of the advantages of establishing a daughter company is also increasing the level of credibility on the market not only for potential customers, but also for the parent company's counterparties. The extensive corporate system gives the impression that the parent company has a stable and established position in the market, which allows it to enter new markets by establishing a daughter company. This is very important from a marketing point of view.

5) financial security

When establishing a daughter company, the parent company most often transfers to the subsidiary some initial capital or certain fixed components that are necessary for running a business. As a result, such a company is better perceived by financial institutions. A daughter company, having its own assets, may obtain a loan, securing its repayment by establishing certain securities (pledge, mortgage). In addition, the daughter company can count - as a new entity on the market - on favorable offers for banking products.

Establishing a daughter company brings many benefits that can significantly affect the profitability of the business, in particular for the parent company, which as a shareholder of such a company can derive tangible material benefits.

However, it is also worth bearing in mind that there may be some negative manifestations of the daughter company's activity, which the parent company will have to subsidize appropriately, thus adding funds at the expense of other entities. All aspects depend to a large extent on the absorptive capacity and wealth of the market on which a given company is to prosper.