What are child entities and how do they relate to other entities?

A child entity is a type of entity that is defined in relation to another, specific entity called the parent. Child entities can be thought of as subordinates or dependents of their parents.

In some cases, child entities may have independent existence but cannot exist without their parents. In other cases, child entities are simply a subset of data stored alongside the parent entity.

This article will discuss the different types of relationships between entities and explain how child entities work within those relationships.

Entities definition

In the simplest terms, a business entity is an organization created by one person or group to conduct business, engage in trade, or partake in similar activities.

There are various types of these — sole proprietorship, partnership, LLC for limited liability purposes. This corporation typically stands alone with stockholders who elect directors at annual meetings and responsible managers guiding its day-to-day operations.

What are child entities?

Child entities are a type of entity defined concerning another specific entity called the parent. Child entities can have an independent existence but cannot exist without their parents. That’s because they inherit the attributes of their parent entities.

What are parent entities?

A parent entity is a single entity that has a controlling interest in another entity. Parent companies are formed when they spin off or carve out subsidiaries through acquisitions or mergers.

Parent companies often have controlling stakes in their subsidiaries, which gives them the power to make decisions about the subsidiary’s operations. Parent companies may also provide financial support to their subsidiaries. Parent companies usually have greater resources than their subsidiaries, which allows them to take on more risk. Subsidiaries are often less risky investments because the parent entity backs them.

Subsidiary relationships with parents

Child entities inherit the attributes of their parent entities. If an attribute is defined for a parent entity, all child entities will have that attribute.

Subsidiaries can also have their unique attributes in addition to the attributes they inherit from their parent entities.

Different types of entities’ relationships

There are three main types of relationships between entities: one-to-one, one-to-many, and many-to-many. A one-to-one relationship means that each entity is related to only one other entity. In a one-to-many relationship, an entity can be related to multiple other entities. Finally, in a many-to-many relationship, multiple entities can be related to multiple other entities.

One-to-one relationship

Child entities always exist within the context of a parent entity. In a one-to-one relationship, each child entity has only one parent entity.

One-to-many relationship

In a one-to-many relationship, each child entity has only one parent entity, but that parent entity can be related to multiple child entities.

Many-to-many relationships

In a many-to-many relationship, each child entity can have multiple parent entities, and each parent entity can be related to multiple child entities.

The relationship between child and parent entities can be either mandatory or optional. A mandatory relationship means that a child entity cannot exist independently. An optional relationship means that a child entity can exist without parent-child relationships. It’s important to note that they rarely share a single location.

The power of parent companies

The corporate structure of a parent entity can take on many different forms, but the common thread is that the parent entity has a controlling interest in the subsidiary companies. This control can manifest in various ways, including owning a majority of the subsidiary’s shares, having majority voting rights, or having veto power over corporate actions.

The parent entity may appoint most of the child entity’s board of directors. In some cases, the parent entity may also control the child entity. Parent companies play an important role in business, and their influence can be felt far and wide.

Legal Entity Identifier for child companies

The Legal Entity Identifier initiative was created after the 2008 global financial crisis, hoping to avoid any future global economic shocks of that severity. To create more transparency within the Global Financial Markets, the LEI code is now essential for legal entities that operate within today’s financial system.

A company’s LEI record will contain public information accessible through a global database. This record will also include “Who owns who” (defined as  ‘Level 2’ data). The Regulatory Oversight Committee (ROC) has defined it as follows –  entities that are renewing or acquiring an LEI will now need to report their ‘ultimate accounting consolidating parent,’ defined as the highest level legal entity preparing consolidated financial statements, as well as their ‘direct accounting consolidating parent.’ In both of these cases, the identification of the parent would be based on the accounting definition of consolidation applying to this parent.

Consolidation combines the assets, liabilities, and results of the parent and its subsidiaries.

The collected information is published in the Global LEI System and, therefore, freely available to public authorities and market participants. At this stage, the Global LEI System will only record relationship data that can be made public under the applicable legal framework.

Still unsure whether and how you need to report your parent entity?

If you still have questions about whether you’re obligated to report the parent entity or are uncertain about your ultimate accounting consolidation parent, don’t hesitate to contact our customer support.

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