Parent-Subsidiary Relationship

A corporation that owns more than 50% percent of the common stock of another corporation is said to be the parent of that subsidiary corporation. A subsidiary may be wholly owned, or partially owned. A wholly owned subsidiary is one in which the parent owns 100% of the outstanding stock of the subsidiary corporation.

The parent and subsidiary are considered to be separate entities, meaning there is no inter-corporate liability from one to the other for outstanding debts. An exception exists when a parent company signs an inter-corporate guarantee obligating itself for the debts of its subsidiary. Thus, if you are asked to sell to a corporation that is not creditworthy that is a subsidiary of a creditworthy parent company, one way to reduce credit risk is to require the parent company to contractually guarantee the debt of its subsidiary - your customer.

Only under special circumstances do the courts rule them to be one organization. Such cases are rare, however, and do not fit in with the usual understanding of parent-subsidiary relationships.

Reprinted with the permission of Credit Research Foundation.

Edited by Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore.