What's a Subsidiary?

The Legal Definition, Carefully

Under US corporate law, a subsidiary is any company whose voting equity is more than 50% owned or controlled by another company, referred to as the parent. The word applies regardless of the underlying entity type — an LLC can be a subsidiary of another LLC, a C-corp can be a subsidiary of an LLC, and a foreign entity can be a subsidiary of a US parent (though the tax consequences change). The parent's ownership must be voting equity, not merely economic equity; passive investment does not create a parent-subsidiary relationship.

Ownership between 50% and 100% is called a "majority-owned subsidiary". Ownership at exactly 100% is a "wholly-owned subsidiary". Ownership at exactly 50% (a joint venture) is not a subsidiary of either partner — it is a horizontal peer relationship. These distinctions matter for accounting consolidation, for voting on major corporate actions, and for tax filings.

Why Own Anything Through a Subsidiary?

The single answer is liability isolation. When you operate a business directly in your own name, every lawsuit is against you personally. When you operate through a subsidiary, every lawsuit is against the subsidiary — and the subsidiary's exposure is capped at its own assets. The parent, its other subsidiaries, and (indirectly) you as the ultimate owner remain untouched.

A common non-US-founder mistake is to run three different online businesses through the same Wyoming LLC. If one of them gets sued — a supplier dispute, a copyright takedown gone wrong, a customer refund class action — the assets of all three lines are on the table. The correct structure is one holding LLC on top, three subsidiary LLCs below, one per line of business. Each pays distributions up. Each is legally its own island.

How the Corporate Veil Actually Works

The "corporate veil" is the legal principle that protects the parent from lawsuits against its subsidiary. It is not automatic. Courts will "pierce" the veil — and hold the parent liable — if the subsidiary was operated as a mere alter ego of the parent. In practice, that means four failures: (1) commingling of funds between parent and subsidiary; (2) failing to observe corporate formalities such as separate meetings and separate filings; (3) under-capitalizing the subsidiary to make it judgment-proof; and (4) using the subsidiary to perpetrate fraud.

Avoiding all four is straightforward when set up correctly from day one: each subsidiary gets its own bank account, its own EIN, its own operating agreement, its own annual report filing, and enough working capital to be a real business rather than a shell. Our FULL plan includes an "arm's-length intercompany agreement" template that documents distributions properly.

Tax Treatment of a US Subsidiary

For US federal tax purposes, an LLC subsidiary of a US LLC parent is by default a disregarded entity, and its income flows straight up to the parent's return. For a subsidiary owned by a foreign parent, the subsidiary is treated the same at federal level but must file its own Form 5472 + pro-forma 1120 each year. If the subsidiary elects to be taxed as a C-corp (Form 8832), it pays the 21% federal corporate rate on its own profits, and dividends to the parent qualify for the Dividends Received Deduction.