Many of our clients have, or interact with, subsidiaries, and we often get asked how this affects their legal issues. So in keeping with our series exploring different types and formats of companies, here we answer your most popular questions on subsidiaries.
- What is a subsidiary company?
- Types of subsidiaries
- The company structure of a subsidiary
- Setting up a subsidiary
- Do subsidiary companies need to be registered?
- Advantages and disadvantages of subsidiary companies
- What is the difference between a subsidiary and a sister company?
- Holding companies and subsidiary companies
- Do subsidiaries have their own CEO?
- Are subsidiaries affiliates?
- Is a subsidiary an asset of the parent company?
What is a subsidiary company?
A subsidiary company is a company of which at least 50% of the equity is controlled by another entity (another company or an Limited Liability Partnership), sometimes referred to as the parent or holding company. Subsidiaries operate as entirely different legal entities from their parent.
Businesses commonly set up subsidiaries in order to divest certain operations or activities, often to maintain a distinct brand for those activities or to contain risks or losses. For example, if a parent company is about to embark on a difficult project or diversify its business activities, it may choose to run these new ventures from a subsidiary company that it controls, so that these are ring-fenced in case of losses.
Subsidiary companies have their own company structure, constitution, accounts and management although the team may be shared with the parent company. The accounts of a subsidiary company will be ‘consolidated’ with the accounts of the parent and any other companies in the group for accounting purposes.
Types of subsidiaries
Subsidiaries can be private or public limited companies, or private unlimited companies. An LLP cannot however be a subsidiary of a limited company. You can also set up a subsidiary in a foreign jurisdiction.
The company structure of a subsidiary
If 100% of the shares are owned by the parent organisation, then the subsidiary is known as a ‘wholly-owned’ subsidiary. If the parent simply owns a controlling interest in the subsidiary (50% or more), then the company is a subsidiary. If the parent owns less than 50% of another company, then that company is simply an associate of the parent company and not a subsidiary.
Setting up a subsidiary
The formalities required to set up a subsidiary are the same as for setting up any other type of company, and as a legal entity in its own right, it will require its own VAT and tax registrations. Here is a list of the information and documents needed to set up a company as a subsidiary at Companies House:
- The name of the subsidiary
- The type of company the subsidiary will be
- The address of the registered office of the subsidiary
- The names and addresses of the directors and any secretary of the subsidiary
- The number and value of the initial shares and any classes of shares
- The memorandum and articles of association of the subsidiary
Do subsidiary companies need to be registered?
Yes, subsidiary companies need to be registered at Companies House (or if they are to be registered in a different jurisdiction, at the companies registrar for that jurisdiction).
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Advantages and disadvantages of subsidiary companies
|Maintenance of separate brands. By creating a subsidiary, perhaps under separate management and with separate employees, you can market the business in a different way from the parent, and create value in the subsidiary that is entirely separate and distinct from the value in the parent company.||Admin costs. There will be set-up costs associated with starting the new subsidiary, and ongoing administration costs to run the business and prepare individual sets of accounts, as well as group accounts at the parent level.|
|Financial difficulties. The insolvency of a subsidiary company will not impact other companies within a group of companies, as it is ring-fenced within that subsidiary.||Containing losses. Ring-fencing of losses or insolvency may not work if other members in a group of companies have given indemnities or guarantees relating to the subsidiary’s activities.|
|Property. Intellectual property and other types of assets can be placed into a subsidiary company and this may protect them from liabilities elsewhere in the group.||Sharing premises. It may be more complex where different companies in the group share offices or other premises to organise the correct legal structure, for example leases and licenses.|
|Disposal. Subsidiaries can prove to be a valuable asset of the parent company, and disposed of just like any other asset.||Tax on sale. Sometimes if a subsidiary is sold, tax considerations may prevent the parent from efficiently realising its profits from the sale.|
|Culture. By maintaining different subsidiaries, you can create entirely different groups of employees, and monitor the performance of each part of your business separately, offering differentiated incentives more easily.||Taxation of share schemes. Favourable tax treatment for employee incentive schemes may mean that these have to be maintained at the holding company.|
|Limited liability. If you are planning to launch a new product or service, or undertake a risky project or venture, you can limit your expose to losses associated with your new business by placing these activities into a subsidiary company.|
What is the difference between a subsidiary and a sister company?
A parent company may own one or more subsidiaries, in which case each of its subsidiaries are known as ‘sister’ companies to one another.
Holding companies and subsidiary companies
A holding company is the term used for a company that has been set up or run for the purpose of owning or controlling subsidiaries, as opposed to conducting business activities in its own right.
Do subsidiaries have their own CEO?
A subsidiary will have its own director(s) and management team, including a CEO if it is a substantial operation. A subsidiary may share its management team with its parent, and possibly pay the parent company management charges for the privilege.
Are subsidiaries affiliates?
Subsidiary companies are not affiliates, as affiliates are companies of which the ‘parent’ only owns a minority stake as opposed to a controlling interest.
Is a subsidiary an asset of the parent company?
Yes, a subsidiary is an asset of the parent company.