Division
Divisions (aka a business sector) are distinct parts into which a business organization/ company is divided. Divisions are fully integrated within the main company and not legally or otherwise distinct from it. Only an "entity", e.g. a corporation, public limited company (plc) or limited liability company, etc. would have a "division"; an individual operating in this manner would simply be "operating under a fictitious name".
Often a division operates under a separate name and is the equivalent of a corporation or limited liability company obtaining a fictitious name or "doing business as" certificate and operating a business under that fictitious name.
Although a division can operate under a different name, it is still a part of the main (parent) business. An obvious example is that Google Video is a division of Google, and is part of the same corporate entity. In a more concrete analogy, you can say that a division is a part of the body, let us say hand, for instance.
When a business produces more than one product or offers more than one service, it often divides into divisions. Each division focuses on a different section of the business plan and works toward a separate goal. A division cannot perform an entirely different operation from that of its parent company; its operations have to be related to the operations of its parent company.
For example, if the main company is into making cars, the division would most likely be a manufacturer of wheels or other car parts and in a business dealing with home repairs, one division may focus on roofing, while another specializes in HVAC-related repairs.
Because individuals within these divisions are all employed by the same overarching company, they can move back and forth between the divisions as needed.
Furthermore, the condition of a division, whether it is doing well or it is not, affects the main company. This means that a division’s debts and all other obligations are legally the responsibility of the main company (parent business).
Note that in a large organisation, various parts of the business may be run by different subsidiaries, and a business division may include one or many subsidiaries.
Benefit of a Division
Creating divisions is substantially easier than developing subsidiaries. Because a division is an internal segment of a company, not an entirely separate entity, business owners create and end divisions at their whim. Also, because individuals in each division are employed by the same company, it's easier to modify staffing to fit with this setup.
Challenges of a Division
When a company creates divisions instead of subsidiaries, they may experience difficulty in developing their organizational structure. If not clearly defined, it can be challenging for employees to determine to whom they actually report. When divisions are in place, workers may feel like they're working for too many bosses and not sure which one they should focus on pleasing. To prevent this problem, create a clear organizational structure, crafting a chart to illustrate that structure, and instruct one individual to deal with managing each group of employees instead of asking your workers to cope with questions and directives from a new boss daily.
Affiliate and Associate Company
In most cases, the terms affiliate and associate company are used synonymously to describe a company whose parent only possesses a minority stake in the ownership of the company. In accounting and business valuation, it is a company in which another company owns a significant portion of voting shares, usually 20–50%. For example, the Walt Disney Corporation owns about a 40% stake in the History Channel, In this case, the History Channel is an affiliate/associate company.
In this case, an owner does not consolidate the associate's financial statements. Associate value is reported in the balance sheet as an asset, the investor's proportional share of the associate's income is reported in the income statement and dividends from the ownership decrease the value on the balance sheet. In Europe, investments into associate companies are called fixed financial assets.
Subsidiary company
A subsidiary is a company that is completely or partly owned and partly or wholly controlled by another company. The most common way that control of a subsidiary is achieved, is through the ownership of shares in the subsidiary by the parent company. These shares give the parent the necessary votes to determine the composition of the board of the subsidiary, and so exercise control. Ownership of 50% plus one share is enough to create a subsidiary but in a wholly owned subsidiary the parent company owns 100% of the subsidiary. For example, the Walt Disney Corporation owns 100% interest in the Disney Channel and 80% stake in ESPN. In this case, ESPN is a partially owned subsidiary while the Disney Channel is a wholly owned subsidiary company.
The subsidiary can be a company, corporation, or limited liability company, in some cases it is a government or state-owned enterprise. Only an entity can be a subsidiary. A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own. The controlling entity is called its parent company, parent business, or holding company.
Each subsidiary is a separate legal entity (an entirely different company) owned by the parent company or by another subsidiary in the hierarchy. For instance, the YouTube video service is a subsidiary of Google because it remains operated as YouTube, LLC, a separate business entity even though it is owned by Google. In a more concrete analogy, you can say that a subsidiary is the offspring with an entirely separate body but is still owned by the parent company. Although the subsidiary is technically separate from the parent company(main business), the owners of the parent company still retain full control over the subsidiary, giving them the ability to guide the subsidiary's actions. Because the subsidiary is a separate business, workers are technically employed by the subsidiary, not by the larger controlling business.
A parent company does not have to be the larger or "more powerful" entity. In some cases, the parent company is much smaller than the subsidiary company while in other cases, it is larger than all or some of its subsidiaries (if it has more than one).
The parent and the subsidiary do not necessarily have to operate in the same locations, plus a subsidiary can perform an entirely different operation from that of its parent company. If the parent company is into making cars, its subsidiary may do something that is not related to car manufacturing at all, e.g. its subsidiary company may have a cellular phone manufacturing entity. The subsidiary does not always need to do something different; it can also operate on something that is related to the business of its parent company, it is even possible that they could be competitors in the marketplace.
Also, the state of a subsidiary company in taxation and regulation does not affect the parent company, even if the subsidiary company is experiencing a financial crisis, it does not necessarily mean the parent company will experience the same and vice versa (e.g. one of them can be involved in legal proceedings, bankruptcy, tax delinquency, indictment and/or under investigation, while the other is not). This is because the subsidiary company and parent company are legally two different companies, and they technically do not share the same system. However, creditors of an insolvent subsidiary may be able to obtain a judgment against the parent if they can pierce the corporate veil and prove that the parent and subsidiary are mere alter egos of one another. Note that the financial statements of a subsidiary will be consolidated into the parent's books.
There are other ways that control can come about, and the exact rules both as to what control is needed, and how it is achieved, can be complex (see below).
In descriptions of larger corporate structures, the terms "first-tier subsidiary", "second-tier subsidiary", "third-tier subsidiary" etc. are often used to describe multiple levels of subsidiaries. A first-tier subsidiary means a subsidiary/daughter company of the ultimate parent company, while a second-tier subsidiary is a subsidiary of a first-tier subsidiary: a "granddaughter" of the main parent company. Consequently, a third-tier subsidiary is a subsidiary of a second-tier subsidiary: a "great-granddaughter" of the main parent company.
The ownership structure of the small British specialist company Ford Component Sales, which sells Ford components to specialist car manufacturers and OEM manufacturers, such as Morgan Motor Company and Caterham Cars, illustrates how multiple levels of subsidiaries are used in large corporations:
·Ford Motor Company - the ultimate US parent company in Dearborn, Michigan
·Ford International Capital LLC - first-tier subsidiary (a US holding company located in Dearborn, Mi, but registered in Delaware
·Blue Oval Holdings - second-tier subsidiary (a British holding company, located at the Ford UK head office in Brentwood, Essex with five employees)
·Ford Motor Company Limited - third-tier subsidiary (the main British Ford company, with head office in Brentwood, with 10,500 employees)
·Ford Component Sales Limited - fourth-tier subsidiary (small British specialist component sales company at the UK Ford head office, with some 30 employees)
The word "control" used in the definition of "subsidiary" is generally taken to include both practical and theoretical control. Thus, reference to a body which "controls the composition" of another body's board is a reference to control in principle, while reference to being able to cast more than half of the votes at a general meeting, whether legally enforceable or not, refers to theoretical power. The fact that a parent company has a holding of less than 50% plus one share which, because the holdings of others are widely dispersed, gives effective control is not enough to give that company 'control' for the purpose of determining whether it is a subsidiary.
In Australia, the accounting standards defined the circumstances in which one entity controls another. In doing so, they largely abandoned the legal control concepts in favour of a definition that provides that 'control' is "the capacity of an entity to dominate decision-making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to operate with it in pursuing the objectives of the controlling entity." This definition was adapted in the Australian Corporations Act 2001: s 50AA. And also it can be a very useful part of the company that allows every head of the company to apply new projects and latest rules.
Benefit of a Subsidiary
Businesses often elect to create subsidiaries instead of sticking with the perhaps easier-to-handle division setup because doing so gives them tax breaks. Because the subsidiary is technically a smaller business, it may be entitled to tax breaks reserved for small business, despite the fact that it's technically part of the larger controlling business.
Challenges of a Subsidiary
When a business elects to create a subsidiary, it may find that retaining control of this subsidiary proves challenging. Although the owners of the parent business technically control the subsidiary, they're likely not a major part of the day-to-day decisions that take place in the subsidiary group, potentially making managing this separate entity more difficult.
Group
A parent and all its subsidiaries together are called a "group", although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership.
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