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Tips and Answers
to Your Questions
Financial Issues
What are the financial issues involved in a parent-subsidiary
relationship?
Legally, a parent-subsidiary structure can be used to create an MSO,
a joint venture corporation, or even the appearance of a merger. However
there are also times when organizations may seek to create a parent-subsidiary
relationship as an end unto itself. This option integrates the "founding" organizations
more than does the creation of a new, separate and jointly controlled
entity (an MSO or joint venture corporation), but less than a full-fledged
merger. It allows the partners to maintain some organizational autonomy,
while gaining some of the benefits of structural integration. Parties
seeking to create a parent-subsidiary structure must define the degree
of integration that best suits their situation.
There are many financial issues to consider when forming a parent-subsidiary
relationship. Among them:
" How will costs be shared? Often a parent and subsidiary will be sharing
some amount of administrative functions, physical space, marketing, staff, training
resources, etc. Who pays for what? How will the balance shift over time?
- How will fundraising be coordinated? Will the organizations raise
funds together, or separately, or both? How will you ensure that
funders and donors are clear on the relationship between the organizations?
How will joint programs or shared administrative functions be funded?
What options will donors have for directing their funds?
- How will financial statements be prepared, and by whom? Are the
corporations sharing a CFO or finance department? Make sure that
the responsible parties understand the filing requirements for both
organizations.
- How will liability be shared between the parent and the subsidiary?
Issues of liability often end up as issues of money. When organizations
share corporate control - of each other or of a third (fourth, fifth,
etc.) entity - they must consider how the boundaries they draw between
them will affect their legal exposure and responsibilities.
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