Spin-off vs Subsidiary: Difference and Comparison

Corporate actions create more entities and also dissolve a few. These actions are taken for the sole reason; the organization must survive.

In this business world, setting up a business and operating it effectively requires a lot of effort. With the everchanging market, new thoughts and creations must keep happening.

The pace of the business must be a high-performance race car. This requires a few restructurings of the organizations too.

The restructuring may also lead to many small business enterprises dissolving and new ones sprouting. The formation of new companies under the same management portfolio has many financial reasons connected to it.

A company is dissolved and can file for bankruptcy. At the same time, a company can be formed, and the shares can be shared between the parent company and the new entity; this helps avoid taxation for the parent company.

Further, the expense of setting up a new business is an entirely tax-free affair. In the context of corporate action, two critical terms emerge; Spin-off and Subsidiary.

Both these terms are interconnected with one another. The Subsidiary is formed due to a spin-off. However, there are differences between the two.

Key Takeaways

1. A spin-off occurs when a parent company separates a business unit or division, creating a new independent company. In contrast, a subsidiary is a company that another company partially or wholly owns.
2. In a spin-off, shares of the new company are distributed to the parent company’s shareholders, allowing them to own shares in both the parent company and the spun-off company.
3. Subsidiaries maintain a closer relationship with their parent company, often receiving financial support, management guidance, and shared resources.

Spin-off vs Subsidiary

In a “spin-off,” a parent company transfers shares of a subsidiary to the shareholders of the parent company, transforming the subsidiary into an individual, independent company. While a subsidiary company is a distinct organization that operates under the supervision of a parent or holding company.

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Comparison Table

Parameter of Comparison	Spin-off	Subsidiary
Meaning/Definition	It is a corporate action that creates one or more entities that function independently of the parent company.	The Subsidiary is a legally distinct new entity formed under the parent company.
Benefits	The spin-off is carried out for 1. Addressing financial and liability issues 2. Taxation issues	1. The Subsidiary has its own identity and 2. Functions independently.
Profit/Loss	The spin-off is carried out for good reasons. Any loss in the past can be addressed by not incurring any new failures.	The Profit or the loss for a subsidiary belongs entirely to it. It has a distinct advantage of the cash flow from the parent company.
Formation	Spin-off aids the formation of new subsidiaries.	The Subsidiary has the advantage of forming a subsidiary under it too.
Tax Benefits	Spin-off gives full tax benefits to the parent company by forming the subsidiary entity.	No such benefits are available for the subsidiaries.

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What is Spin-off?

A spin-off is a well thought corporate action where a parent company creates a subsidiary entity to take care of a specific part of the business. The parent company’s shareholders receive the shares of the new company as well.

In this way, the shareholders benefit from holding both companies’ shares. Spin-off gives rise to huge accountability and responsibility to the subsidiary entity.

There are many reasons for a spin-off; the main one is to give undivided attention to certain core operations. The other reasons are on the lines of scaling up the Profit and addressing financial issues.

When a spin-off happens, the Subsidiary takes a part of the assets from the parent company. In return, a pre-defined amount is paid to the parent company.

Once a spin-off happens, the Subsidiary runs independently of the parent company with a new management team. But the management team members are often acquired from the parent company.

Spin-off offers a great advantage to the Subsidiary as the parent company strongly backs it. It also gives rise to new ideas in an environment, thereby strengthening the subsidiary entity.

The parent company offers specific support to the Subsidiary after the spin-off. Parent company invests equity, helps create cash flow, and provides legal and financial advice.

 

What is Subsidiary?

A subsidiary is a company formed, owned, and controlled by the parent company. The subsidiary entity is a new firm that operates independently with its own identity.

The subsidiaries can be of different types. It can be a company or a corporation, while sometimes they can be limited liability companies also.

Many multinational companies follow this procedure of forming a subsidiary to offer more focus on certain operations in the new entity. Subsidiary functions on their own with specific controls revolve under the parent company’s circle.

Subsidiaries are legal entities formed by the holding company for many reasons. The primary purposes of creating a subsidiary are liability, taxation, and regulation of certain norms.

The subsidiaries are legally distinct divisions, but the operations often complement the parent company’s goods or services. The legality distinction gives both companies the advantage of operating effectively in their respective roles.

It is good to be observed that the parent company need not be a big company to start a subsidiary. It can be smaller than the Subsidiary too.

The subsidiaries are not required to function in the exact location of the parent company. There are multiple levels of subsidiaries available; first tier, second tier, and third tier; these companies started one below the other for many commercial reasons.

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Main Differences Between Spin-off and Subsidiary

1. The main difference between Spin-off and a Subsidiary is that Spin-off is a corporate action forming new subsidiaries that function independently of the parent company. In contrast, the new shares are offered to the existing shareholders of the old parent company. The Subsidiary is a new legal entity formed by the parent company to focus on critical areas of operations that the parent company requires.
2. The benefits of a spin-off are on the taxation grounds and also can address a few financial issues. At the same time, the Subsidiary has the distinct advantage of functioning independently with its own identity.
3. Spin-off, indeed is carried out for good reasons only. The parent company shall not suffer any loss by a spin-off, while the Profit or loss of the Subsidiary also does not impact the parent company.
4. Spin-off forms subsidiaries, while subsidiaries can also form subsidiaries under them as second-tier and third-tier subsidiaries.
5. The tax benefit is available for the parent company at the event of the spin-off, while there are no such tax benefits for the subsidiaries.

References

1. https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.4250130604