Businesses can take on a number of forms and structures. Their legal status and the rights and roles affixed to that legal status are determined by their form and structure. In your work and personal life, you will likely engage with all types of business structures. Knowing how they operate and what each structure means can be vital for your own interests. As well as sole traders and companies, you may also come across divisions and subsidiaries. It is useful to know what makes these distinct and unique from one another. We have outlined a few points that address the difference between a division and a subsidiary for you below.
Separate legal entity
The separate legal entity principle distinguishes sole proprietors from companies. A company is its own separate legal entity. Unlike a person trading as a sole proprietor, whose rights and liabilities are affixed to that business, a company has its own legal status. Therefore, a company can do many of the things that a normal legal person can. For example, it can own land, have a right of suit, or be sued. These are just a few things that give a company its own status.
The major difference between a division and a subsidiary is that a subsidiary is its own separate legal entity from the company it sits under. The company above it can be known as either a parent or holding company. Even though another company can technically be another company’s majority shareholder, a subsidiary is nonetheless distinct. A parent company could also simply be a company that wholly owns another company, which is then known as a ‘wholly owned subsidiary’.
In contrast, a division is an arm or branch of any company that forms a specific function within that company. For example, a bank might have a loan division. That loan division is not a separate entity, albeit that it fulfills a unique function within the company. Other examples include billing, HR, complaints, sales, IT, and so on.
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Role of each
The role of a division is distinct from that of a subsidiary. While a subsidiary may have some corresponding or similar aims to its parent company, it will also have an intent of its own to achieve certain things. For example, a parent construction company may have a subsidiary plumbing company, but it will operate under different pretenses and conduct work of its own accord. It may carry with it the reputation or branding of a parent company, but is its own legal entity. As such, it will focus on fulfilling its own aims and agenda. However, where a construction company has a plumbing division within that company, the plumbing division will be working primarily to fulfill the overall aims of the company it is part of.
While departments and divisions all have their own aims, the ambit of their work will always stay within the requests of the company. Conversely, a subsidiary company may not always be bound to the requests or influence of a parent company.
Other differences
Given the major difference being that a division is part of a company, while a subsidiary is its own separate legal entity, there are several other factors that follow:
- A division shares the same identifers (such as Tax Identification Number, Employer Identification Number) as the company it is a part of. It does not have numbers of its own.
- Subsidiary companies bear tax burdens, while divisions do not.
- While a division may have its own protocol and practices, it is still bound by its company constitution, whereas a subsidiary will likely have a company constitution of its own.
- Wage and payment structures of a division will fall within the purview of its company. However, a subsidiary can have its own separate payment cycle and regime.
Holding companies
A holding company is one that owns shares in other companies. It usually will not produce goods or services itself. Its main purpose is to own shares of other companies to form a corporate group. These other companies are typically subsidiary companies. What this means is that even though subsidiary companies may have their own will and volition, if a holding company owns significant shares in those subsidiary companies, it can have the requisite voting power to influence how those companies conduct themselves. It very much depends on each unique case.
Evidently, there are more to companies than meets the eye. They can be part of very complex structures or are intricate structures unto themselves. Knowing where liabilities start and end is an important part of understanding how company law works. While there are some simple rules to follow, each situation can be different. Therefore, seeking help where required is always advised. Talking to a company lawyer can help further your understanding of these corporate structures.
