The Difference Between a Subsidiary & a Business Unit

Facebook, IBM and other large organizations have subsidiary units, business units, affiliates and everything in between. Each type of business entity falls under different regulations and has a distinct role. Whether you’re planning to expand your reach or start a corporation, make sure you understand the difference between a subsidiary and a business unit.

What Is a Business Unit?

The terms “business unit” and “subsidiary” are often used interchangeably despite having different meanings. Generally, small- and medium-sized companies have one main office. As they expand their operations, they may open new offices as business units across the city or state. Multinational corporations and large organizations employ hundreds of people and may target more than one market at a time. To keep things running smoothly, they organize themselves into divisions, subsidiaries, business units and other entities.

A business unit is a department or team within an organization. It has a specialized function and must develop its own strategy in alignment with the company’s objectives. As Boston Consulting Group notes, business units can only prosper if they meet the ever-changing needs of their target audiences and maintain a competitive advantage.

Think of a business unit as a highly specialized entity. For example, companies with a diverse customer base may set up individual business units for each market or product line. This allows them to operate more effectively and segment their products or services. Furthermore, organizations can set strategic goals and milestones for each unit and make better decisions regarding project management, resource allocation and other key aspects.

Boston Consulting Group, for example, has multiple business units. BCG Omnia specializes in software and data solutions, while BCG Gamma helps businesses grow through advanced analytics and artificial intelligence solutions. Other business units within the organization provide supply chain and procurement consultancy services, conduct market research, and assist entrepreneurs.

Business Units vs. Subsidiaries

Business units operate independently but report to the company’s headquarters. They are big enough to have HR departments, sales teams and other support functions. An organization may have regional, national or global business units that can be further divided into several categories, depending on their role.

The primary difference between business units and subsidiary units lies in their ownership. A business unit is a department or functional area within an organization. A subsidiary is owned or controlled by another company and may have its own business units. Each business entity is subject to different regulations and tax laws and has distinct characteristics.

Subsidiaries are fully or partially controlled by another organization, which is referred to as the parent or holding company. A parent company must own at least 51 percent of the shares in a subsidiary, explains the Corporate Finance Institute. If a corporation purchases less than half of another company’s stock, the latter becomes an affiliate company.

When a corporation purchases 100 percent of the stock of another company, the subsidiary is “wholly-owned,” notes Georgetown Law. Subsidiaries can be limited liability companies, government enterprises or corporations. Facebook, for example, has several subsidiaries, including WhatsApp Inc., Oculus VR LLC, Facebook Ireland Limited, Pinnacle Sweden AB and others, according to the U.S. Securities and Exchange Commission.

Large organizations form subsidiaries to enter new markets, negotiate better terms with suppliers, or bypass tariffs on imports. This approach also allows them to create job opportunities in developing countries. Subsidiaries may have a different legal status than that of the holding company, and therefore, they may enjoy certain tax advantages.