One of the common strategies of the firms, to expand their business at the national or international level, is to set up branches, at different places. Branches are a part of the parent organization, which are opened to perform the same business operations as performed by the parent company, to increase their reach.
Branches are not exactly same as the subsidiary company. A subsidiary company is a company, whose controlling stake is held by another entity, i.e. the holding company. Both branch and subsidiary company are owned by the parent company but are different in many ways.
The article explained below shed light on the differences between branch and subsidiary of a company.
Content: Branch Vs Subsidiary
|Basis for Comparison
|Branch implies an establishment set up to by parent company, to perform the same business operations, at different location.
|Subsidiary company is understood as the company whose full or partial controlling interest is held by another company.
|Branch conducts same business as parent organization.
|Subsidiary may or may not conduct same business as parent organization.
|Separate legal standing
|Either separately or jointly
|The parent organization has 100% ownership interest in the branch.
|The parent organization has >50-100% ownership interest in the subsidiary.
|Extends to the parent company.
|Limited to the subsidiary.
Definition of Branch
Branch is defined as an extension of the parent organisation, which is set up at another location, to increase their coverage. It carries out the same activities as performed by the head office. The officer-in-charge of the branch is known as the branch manager, who is directly responsible for the work of the branch, as well as reports to and take instructions from the head office.
Most of the banks and financial institutions have branches that are opened to play the agency role. Setting up branches at various remote locations, increases the customer base, accessibility and also helps in timely and effective distribution of goods and services.
Example: The head office of Reserve Bank of India is located in Mumbai, and it has 20 branches (regional offices) which are located in the capital cities.
Definition of Subsidiary
The term subsidiary company is a business entity, whose ownership and control is in the hands of another business enterprise. Usually, when a company buys another company, the buying company, is called as holding the company and the company so bought is the subsidiary.
A company is said to be a subsidiary of another if any of the three conditions are satisfied:
- Ownership stake: If another company owns 50% or more, the total equity share capital of the corporation.
- Composition of Board of Directors: If in a company the composition of Board of Directors (BOD) is decided by another company. The composition of BOD means that another company appoints all or majority of directors.
- Deemed Subsidiary: If a company is a subsidiary of a company, which itself is a subsidiary of another company. For instance: Gamma Ltd. is a subsidiary of Beta Ltd., and Beta Ltd. itself is a subsidiary of Alpha Ltd., then Gamma Ltd. is a deemed subsidiary of Alpha Ltd.
Key Differences Between Branch and Subsidiary
The points given below are noteworthy concerning the difference between branch and subsidiary:
- Branch can be understood as the entity other than the parent company, wherein same business as that of the parent is carried out at a different location. On the other hand, if a company has ownership and controlling interest in another company, then the company which owns and controls, is called the holding company and the company which is so owned and controlled is known as a subsidiary company.
- Branch has to report to its Head Office for its operations. On the other hand, the subsidiary company comes under the holding company, which holds its majority stake.
- The Branch office may carry out the same business operations as the Head office. Conversely, the subsidiary company may or may not undertake the same business operations as the holding company.
- While a branch has no separate legal standing, a subsidiary company is a separate legal entity and has an identity different from its holding company.
- In case of branches, there may be the joint or separate maintenance of accounts, whereas the subsidiaries maintain their own separate accounts.
- If we talk about investment to open a branch a subsidiary, the parent company has to make 100% investment in setting up a branch at a different place. Unlike, the parent company has to make an investment of >50 to 100% to own a subsidiary company.
- Liability of the Branch office, extends to the parent organization, i.e. when the branch is unable to discharge liabilities, it has to be paid by Head Office. In contrast, the liabilities of a subsidiary company do not extend to the holding company.
- If a branch continuously suffers losses, it is closed down, whereas if a subsidiary is prone to losses, it is sold out to another company.
To sum up, branches are set up with the sole aim of increasing the business coverage and facilitating easy distribution of goods and services. On the other hand, owning a subsidiary primarily accounts to expanding the business entity, by purchasing a company operating in similar or different business. Branches and subsidiaries located in the foreign country, follow the rules and regulations of the respective country.