What it is:
A parent company has control of the management and operations of a subsidiary company. It is also referred to as "holding company."
How it works (Example):
A parent company may be involved in the ownership and control of the subsidiary company for a variety of reasons. For example, a parent company may have spun off the subsidiary into a new separate company to reduce the overhead and streamline the operating costs. Alternatively, a parent company may buy shares as well as control of a company to enable it to integrate and coordinate its activities with other subsidiary businesses under the control of the parent company.
Why it Matters:
Sometimes, a parent company will create subsidiaries for tax and liability purposes, creating separate entities with legal and financial shields to protect it the parent company from recourse or liability. However, tax and legal treatment of parent companies differs among countries and should be understood and considered.