Introduction
Spin-off and Subsidiary are terms related to a business entity or a corporation. Spin-off can be called an action performed in a corporation where a particular department or section of a parent company is separated from the entire company and is built as a completely separate business entity. However, the subsidiary is a company owned and controlled by the parent or holding company.
Spin-off vs Subsidiary
Spin-off is a corporate action, performed only in a corporation, whereas a Subsidiary is a smaller company that is owned and controlled by a parent company, and this is the main difference between both of them. A Spin-off company, which means a company formed through the Spin-off process, is formed from a part or section of the main company or the parent company and then becomes a completely separate and independent business entity. A Subsidiary, on the other hand, may or may not be formed by a parent company. It is a smaller company that is recognized as a separate legal entity but unlike a Spin-off company, it does not have independence and is owned and operated by a larger company, often referred to as the parent company or holding company.
Difference Between Spin-off and Subsidiary in Tabular Form
| Parameters of Comparison | Spin-off | Subsidiary |
| Meaning | A Spin-off is referred to as a corporate action that leads to the creation of one or more separate legal business entities that are independent of the parent company | A Subsidiary is a company that is owned and regulated by another company. |
| Formation | A Spin-off is usually formed out of the parent company. | A Subsidiary may or may not be formed from a parent company and can be a separate, smaller company owned by a parent company. |
| Independence | A company formed through the Spin-off action is independent of the parent company | A Subsidiary company is not independent of the parent company and is controlled and regulated by the Parent company. |
| Advantage | Taxation, financial, and other liability issues can be addressed by acting Spin-off. | The Subsidiary even though it is regulated by a parent company, is still recognized as a separate legal entity and to some extent, has independence in management. |
| Size | To form a subsidiary company through Spin-off action, the parent company needs to be larger than the subsidiary company. | It is not necessary for the parent or the holding company to be larger than the subsidiary company. The parent or the holding company, can be smaller in size than the subsidiary company. |
| Liability | In this case, the parent company is not so much liable for the responsibilities of the Spin-off company since it is recognized as a separate legal entity and functions independently. | A subsidiary company is regulated by the parent company, so the parent company has to bear its liabilities. |
| Cause of Creation | It is mainly done to put more focus on a particular section of the main company that has considerably developed to become an independent company. | Subsidiaries are created by the parent company to expand their business and areas of marketing. |
What is Spin-off?
A Spin-off can be called an action performed in a corporation. Subsidiary is a type of company working under the control of another company namely the parent company. When the action of Spin-off is conducted by the controlling company, then all the shares of the subsidiary company get transferred to the existing shareholders of the parent company and the subsidiary company gets converted into an independent company with a separate legal entity that is no longer under the control of the parent company. The independent subsidiary company formed out of Spin-off action is formed from a part of the main company. The spin-off action is taken by a parent company when it feels that a particular section of it has grown considerably and is capable of standing alone as an independent company. Only the parent company separates that part through the spin-off action. However there remains a link between the parent company and the independent subsidiary since, after all, that company is formed out of its parent company. A Spin-off can also be called a starburst or spin-out.
There are many reasons why a parent company conducts the action of Spin-off which are: -
- The main company may think that the spin-off company will make more profit and will be more valuable if it is independent and separated from the parent company and if it is provided with separate resources for its development. This will be more profitable when the concerned section of the parent company that will be spin-off has considerably grown to claim the status of a separate and independent company because then it will be able to bring more profits to the company.
- When the concerned part of the parent company that is being separated is not performing well, spin-off helps the parent company to get rid of this weaker section that may have hampered the progress of the parent company while it was a part of the parent company. Spinning off the weaker section increases the potential and efficient functioning of the parent company.
- Sometimes a spin-off is done when a parent company feels that a particular part of the company no longer complies with the objectives and guidelines of the company and is wasting the resources of the company, then the parent company may spin-off that section of the company.
- It is also a fact that sometimes a parent company conducts a spin-off rather than selling that part of the company to simply avoid the capital gains tax that comes along with the sale.
- A Company consists of various objectives and strategies, so sometimes it becomes difficult for a single company to carry on with such a vast range of options, which is why a parent company sometimes decides to spin off a single part or some parts of the main company to create independent, separate legal entities to ensure the proper and efficient functioning of the main company.
Types of Spin-Offs
A Spin-off is a strategic activity undertaken in a corporation. There are several ways in which a parent company can spin off a particular section or department of the corporation, which are:
- Pure Play
- Equity-Carve out
- Tracking Stocks
- Stubs
Pure Play
Pure Play can be considered as being among the purest methods of spin-off. Pure play enables the shareholders of the main company to receive dividends in the form of shares from the spin-off company or the independent subsidiary.
Equity-Carve out
This method of spin-off is partial where the total value of the concerned section of the company or the subsidiary company is divided into two parts which are 20% and 80% by the parent or the holding company. To raise capital, 20% of the total value of the subsidiary are initially issued as a public offering, and the remaining 80% of shares are distributed to the existing shareholders of the parent company as special dividends.
Tracking Stocks
The main aim of Tracking Stocks is to benefit from the increased share price of the parent company. In this case, the spin-off company gets separated from the parent company in physical terms and not in legal terms regarding assets and liabilities. Although the reporting and the analysis of the financial section of the subsidiary company are done individually by the company itself, the parent company ultimately manages it as the board of directors remains the same for both the company.
Stubs
The stub is the share value belonging to the parent company that remains after the spin-off action. The stub can be calculated by deducting from the parent company’s total share value the share value of the subsidiary company that has been created through the corporate spin-off action.
What is Subsidiary?
A Subsidiary is a company that has no independence of its owns and works under the control of a parent company. The major criteria for a parent company to control another company as a subsidiary is that the majority of the share of the subsidiary company should be controlled by the parent company. When a parent company completely owns a subsidiary then that subsidiary is called a wholly owned subsidiary. When a parent company has control over the majority of the share of another company or when it has bought another company, then that company comes under the control of the parent company and becomes its subsidiary. It is not mandatory that a subsidiary company will have to be smaller than the parent company, and the parent may or may not create a subsidiary like a spin-off company, and in that case, another company has to act as the subsidiary of the parent company.
The owning of the majority of the shares of a subsidiary which is at least 51%, actually gives power to the parent company in terms of controlling the subsidiary where it will be able to decide the business strategies of the subsidiary and will exercise power in appointing the board of directors. Subsidiary companies are subsidiaries because they are owned and regulated by another company, but the parent company does not necessarily control everything of the subsidiary company, and it can still function as a separate legal entity only without the full independence that is available for a spin-off company. Moreover, subsidiary companies need not be in the same location as their parent companies, and their business motive can also be different from their parent companies.
There are several reasons and benefits why a parent company should opt for subsidiary companies, which are: -
- The losses suffered by a subsidiary company do not turn out as a burden for the parent company because the subsidiary company is recognized as a separate legal entity which means the parent company does not have to take responsibility for the losses. It is also the fact that the assets of a subsidiary company do not get affected if it faces a loss because they are protected by the parent company.
- A parent company may only cater to a particular kind of audience and market within a limited field but creating subsidiaries expands this field of business. A parent company may own a subsidiary that works on a different brand image, and a parent company and a subsidiary do not need to work on the same vision. A subsidiary can be created when a parent company wants to expand its field of marketing and offer various other types of products and services, which also leads to connecting with new audiences.
- Subsidiaries can be created by a parent company to expand its business to other countries and regions. It is like creating subtypes or branches of the main head. The local customers and the legal and financial rules of that place are maintained and adhered to by the concerned subsidiary of that place.
Types of Subsidiaries
There are two types of subsidiary companies which are: -
- Partly Owned Subsidiary
- Wholly Owned Subsidiary
Partly Owned Subsidiary
In a partly-owned subsidiary, the parent company does not fully own the subsidiary. It is a partial shareholder and has to own at least 51% but less than 100% to partially control the subsidiary. The control is partial in this case because the parent company is not holding 100% of the shares which is why it cannot entirely control the subsidiary.
Wholly Owned Subsidiary
A Wholly owned subsidiary, as the name suggests, is completely owned by the holding company as it holds 100% or the entire shares of the subsidiary. But it is to be kept in mind that a wholly owned subsidiary cannot be called a merger.
Main Differences Between Spin-off and Subsidiary (In Points)
- A Spin-off is a corporate action performed specifically in a corporation, whereas a subsidiary refers specifically to a company that is controlled and regulated by another company which is the parent or the holding company. So, a subsidiary is a company under the control of another company. It is through the action of Spin-off that the main company can separate a particular part or department and give it the status of a separate legal entity that is completely independent of the parent company. The newly created spin-off company can also be called a subsidiary company, but with the only difference being that it is an independent subsidiary. This is because the bond still remains between the parent company and the spin-off company.
- A Spin-off company, or an independent subsidiary, as it might be called is recognized as a separate legal entity. A parent company can form many independent subsidiaries through the spin-off act. The parent company is never responsible for a spin-off company. This is because the parent company does not own any majority share here and also because it has the identity of a separate legal entity with additional independence from the parent company. This is not applicable in the case of a subsidiary because the majority of its share is owned by the parent company, which takes away its independence. So, the subsidiaries do not have any independence in decision-making, which is why the parent company to some extent, bears the responsibilities of the subsidiary company.
- A Spin-off company is usually formed out of its parent company, as a particular section of the parent company is separated through the Spin-off act to form the spin-off company and the parent company or the holding company needs to be larger than the Spin-off company. A subsidiary does not necessarily need to be formed from a parent company like a spin-off. It can be a completely different company controlled by the parent company. But in this case, the parent company need not be larger in size than the subsidiary. It can also be smaller than the subsidiary.
- A parent company performs the act of spin-off and creates a spin-off company that is recognized as a separate legal entity and is independent of its parent company to address liability, taxation, and other financial issues whereas a subsidiary company has limited independence in terms of decision making because the parent company controls the majority of it. Spin-off is conducted for many reasons, such as focusing on a particular area of the parent company that has grown considerably to become a separate company to bring in more profit or to exclude a weaker section of the parent company to improve its overall functioning. On the other hand, a subsidiary is created to expand the field of business of the parent company and to gather new customers.
Conclusion
Hence, the main point of difference between Spin-off and a subsidiary is that spin-off is a corporate action whereas a subsidiary is a company controlled and regulated by another company. A subsidiary can become an independent subsidiary, or a spin-off company can be created through the act of spin-off. A Spin-off company is usually created from a part of the parent company, but a subsidiary may or may not be formed from a parent company. Finally, a spin-off company is created to put more focus on a particular section of the company, whether it should be excluded from the parent company or given more area for improvement. A subsidiary is created to expand a parent company’s field of business and marketing.
References
- https://www.thebalancemoney.com/what-is-a-subsidiary-5207638
- https://corporatefinanceinstitute.com/resources/accounting/subsidiary-definition/
- https://www.british-business-bank.co.uk/finance-hub/pros-and-cons-of-starting-a-subsidiary-business/
- https://efinancemanagement.com/financial-management/subsidiary-company
- https://www.thebalancemoney.com/what-is-a-spinoff-5204697
- https://www.samco.in/knowledge-center/articles/corporate-spinoffs-in-india/
- https://theinvestorsbook.com/corporate-spinoff.html
