The Advantages and Disadvantages of Forming a Subsidiary Company

As your San Diego business grows, you may consider forming a subsidiary company to help you diversify into a different niche or expand into a new geographic market. Before doing so, however, you would be wise to learn a little more about the advantages and disadvantages of creating a subsidiary:

The Advantages of Forming a Subsidiary Company

When you have your business attorney in San Diego help you create a subsidiary company, you will enjoy a wide range of benefits. A short sampling of some of the most noteworthy advantages of forming a subsidiary would include:

Limited Liability

Launching a new line of products or expanding into a new territory can be quite risky. You might not gain traction as quickly as you hoped, you may sign a lease on a property in a poor location, or you could even lose a lawsuit. Fortunately, when you form a subsidiary, you can limit the liability your parent company can incur as a result of the losses made by your new venture.

Separate Branding

Forming a subsidiary allows you to create a new face to present to your clients and the public at large. If, for instance, your San Diego business has traditionally sold shoes to seniors, the formation of a subsidiary can allow you to put together a separate branding strategy that is more appealing to younger buyers – without alienating your core market.

Increased Investment Interest

When you form a subsidiary company, you essentially wall-off specific sections of your business. In doing so, you may find that it is much easier to attract interest from outside investors. Once you create a subsidiary, an investor only needs to believe in one particular segment of your organization to provide you with capital. Without the subsidiary, they would need to have faith in your entire operation.

The Disadvantages of Forming a Subsidiary Company

As you can see, many businesses can benefit tremendously from creating a subsidiary company. However, before you instruct your California business lawyer to begin the formation process, there are a couple of disadvantages that you should be aware of, such as:

Cash Flow Challenges

Depending on the legal structure of the relationship between the subsidiary and parent companies, it may be tricky to move money between the two. As a result, you may find that one of the two businesses runs into cash flow challenges from time to time.

Increased Filing Requirements

In the eyes of the state and federal governments, your new subsidiary is a company in its own right. As such, it is expected to file tax and compliance documents every year with the IRS and Secretary of State, just like any other business. This fact essentially doubles your organization’s annual paperwork load. Your California business lawyer and accountant should be able to handle this additional work fairly easily, however.

Your Trusted Business Attorney in San Diego

Do you need an experienced California business lawyer to help you create a subsidiary company? If so, please do not hesitate to reach out to give the Semanchik Law Group a call at (619) 535-1811. We have been helping San Diego businesses with their legal needs for years, and we would love to add your name to our long list of satisfied clients.