We’d like everyone to close their eyes, count slowly to ten, and picture a garage. And not just any garage. Picture a huge garage with, like, ten cars in it. Maybe there’s a brand-new Jaguar over here, maybe there’s a ten-year-old Subaru Outback over there. Okay, everyone got their garage pictured? Great. Now let’s say that one of those cars—let’s go with the Jag—is out on the road when, all of a sudden, it’s involved in a major car accident. The vehicle isn’t totaled, but it’s close. That really sucks, but the good news is that none of the other nine cars were affected by the Jag’s accident, even though they all share a garage.
This is kind of how a “protected cell company,” or PCC, works. There is one overarching legal entity—the garage—that oversees and manages all the little protected cells, which are the cars. Each cell operates on its own, and if it incurs liabilities (like our Jaguar), those liabilities are its own only, and do not get pushed off onto the other cells.
Some folks out there might be thinking, “Gosh, PPCs sound a lot like segregated portfolio companies, or SPCs.” To them, we would say...yes they do, because they’re the same thing.
And others might be saying, “Gosh, this sounds like your standard parent company-subsidiary corporate structure.” To them, we would say...sort of, but there are some significant differences. For one, PCC cells are a lot more financially and legally separated than sister companies are. And two, parent companies and their subsidiaries are everywhere, but PCCs only exist in a handful of places, like the Cayman Islands, Bermuda, and the state of Delaware.
The whole purpose of this arrangement is so that, if one cell goes belly-up, the other cells can’t be held liable for its losses. So far, this theory has never actually been tested in court, so we don’t know if cells would be legally treated like subsidiaries…or like the separate entities they sometimes really want to be.
You can open your eyes now.
Related or Semi-related Video
Finance: What is a subsidiary?1 Views
and finance Allah shmoop What is a subsidiary All right
people What is a subsidiary Is there like a Domus
City Eri Just like a 50 shades thing Maybe not
Well they're both complicated and have to do with control
But no put those fuzzy handcuffs away A subsidiary is
a company that has a parent company which means it's
owned and controlled by another company Pet TV Corporation comprises
18 different divisions each of whom operate one form or
another of TV For pets There's Kat TV which runs
channels from the Tim Miao channel to the more 50
shades flavored Scratching Hiss There's also dog TV with books
and squirrel channels and bunny TV with Meadow and will
of course Fox Channels Yes it's the other Fox channel
with no actual foxes Well each of these divisions has
operated separately a subsidiary companies for accounting and operating efficiency
reasons At the end of the reporting period all of
the results are rolled up into one Final number is
reported by the parent company Pet TV Well the 18
subsidiaries all comprised value inside of the parent They'll get
kind of rolled up to give investors one number parent
and child Cos Air all around you even if you
didn't know it In real life big names like Alphabet
a Google and Amazon are actually parent companies of a
whole bunch of subsidiaries Amazon owns audible all the way
down through Zappos alphabet which used to be Google Is
the parent company with yes 26 different subsidiaries Very clever
Good luck with your taxes there this year Alphabet They've
got Calico an RD company fighting the Grim Reaper and
aging You've got capital G a venture capital for start
ups You know who have their craft together Google of
course That search engine thing with all the ads that
you use on the rag there in some And then
there's loon bringing the Internet to the boonies Yeah well
why Air subsidiaries Even thing Well it always comes down
to money doesn't it Subsidiaries can be smarter for for
some accounting reasons but the main benefit is this separate
assets so that each subsidiary company has its own managed
branch of risk That way if Calico the anti ageing
research and development subsidiary of Alphabet gotten trouble down the
road for having some cryogenically frozen head wake up early
and sue them Then Calico would be sued and take
on the liability alphabets Other subsidiaries like Google Capital G
and Loon would continue to function as if everything else
was fine Just fine probably And lawyers would of course
who all of alphabet but subsidiary Usually there's a legal
protection built in there So sure if that disembodied heads
suit alphabet parent company well that would put all the
subsidiaries in potential jeopardy which is a risk in itself
Still it's easier to have all the finances separate so
the parent company can see and choose what assets are
paying for what liabilities right Well subsidiaries also make more
sense for some industries like in real estate it can
be easier to create a new subsidiary for a new
batch of properties than incorporating all of them into one
existing company like think of the funnest real estate company
on the planet Disneyland Writer At least Disney Disney Cos
you have Disneyland That's one piece realistic then Disney World
Then he have like Disney China which is a joint
venture and Disney Europe which is a different joint venture
there all subsidiaries of the Disney Corporation So keeping those
liabilities separate in case while that new batch properties is
actually sitting on some slippery limestone which would cause some
well pisa situations you know if you know we mean
so that would be bad and you keep in separate
Teo keep liability separate and keep track of things separately
And if well the manager of Disney World's doing a
much better job than the manager of Disney Land while
they should be compensated for it or least taking care
of better right So while taxes and accounting can't be
more complicated with subsidiaries there's benefits to like offsetting the
losses of one subsidiary with the profits of another one
Just a hedge out Taxes III So you don't owe
any and just you know parent companies or sometimes called
holding companies and subsidiaries or sometimes called divisions or branches
Yeah and some people call 50 shades of grey Good 00:03:57.618 --> [endTime] book Some people just saying Oh yeah
Up Next
What is a Holding Company? A holding company is a company that controls enough voting stake in another company to have control over operations. Usu...