A subsidiary company is an incorporated company that is owned or controlled by another business, referred to as the parent or holding company. Setting up a subsidiary is a worthwhile consideration if you are looking to expand into new markets, or diversify the products or services that your existing company sells.
In this post, we explain what a subsidiary company is, discuss the most common reasons why some businesses create them, and outline the steps required to set up a subsidiary company in the UK.
What is a subsidiary company?
Subsidiary companies are normal limited companies in which at least one other company has a controlling interest. A company becomes a subsidiary as a result of:
- being purchased by one or more other companies through a merger or acquisition; or
- being created by an existing company to carry out specific operations separate from its own
The firms that own all or part of subsidiary companies are known as parent companies or holding companies, depending on the situation.
Parent companies usually have their own trading operations in addition to owning subsidiary companies. Holding companies, on the other hand, are usually non-trading companies that exist for the purpose of holding assets or owning a controlling interest in other firms.
Whilst a subsidiary is related to its parent or holding company, it is still a legally independent entity with its own identity, liabilities, and tax and filing obligations. However, the parent or holding company retains overall control, with the ability to exert influence over the subsidiary’s operations.
Why do companies create subsidiaries?
There are many reasons why companies choose to create subsidiaries, either in the UK or another country.
The decision is usually driven or influenced by multiple factors, with the overall objective of pursuing and facilitating business opportunities.
Typically, however, the most common motivations are as follows:
1. Product diversification
When an established company is planning to diversify its offerings, it may decide to do so through a subsidiary, rather than under its current company.
Perhaps the parent company needs to test a new idea, introduce a different line of products or services that do not quite fit with its existing brand image, or create a number of independent brands under one large corporate group.
Creating a subsidiary provides this flexibility, enabling you to develop and market new or different business activities in ways that differ from the established brand of your existing firm.
This makes it easier to organise and differentiate your activities more effectively, whilst creating distinct brand value in your subsidiary company.
2. Expand into new markets
If you want to expand your business into new markets and industries, establishing a subsidiary company, rather than opening a branch of your existing brand, can help to facilitate your business growth strategy.
This can be particularly beneficial if you’re planning to venture into overseas markets. By setting up a subsidiary company in each location, you can create and maintain a distinct corporate presence that is tailored to the needs and regulations of each market.
3. Minimise risk and manage liability
One of the main draws of creating a subsidiary company is that it mitigates risk and minimises the parent company’s financial liability. This is because the two companies are legally separate.
If the subsidiary loses money, becomes insolvent, or is involved in any type of legal battle, the parent company is protected to a certain degree and, in many cases, will not be held liable.
The parent-subsidiary framework acts like a safety barrier, enabling the parent firm to isolate and manage the potential risks and liabilities of the subsidiary.
So, the parent company can limit its exposure to any losses experienced by the subsidiary, whilst maintaining full control over its activities.
4. Tax benefits
The UK no longer has a flat rate of Corporation Tax – the rate now increases proportionally from 19% to 25% on annual profits between £50,000 and £250,000. Therefore, by setting up a subsidiary, both companies will enjoy lower Corporation Tax rates than if all profits were generated through a single company.
Moreover, you may be able to claim group relief by offsetting the losses in one company against the profits or gains of the other company in the same accounting period.
If your business manufactures and sells goods, a subsidiary may enable you to set up your manufacturing operations in a country with more favourable tax rates, whilst maintaining your other business activities in the UK.
The group structure can also allow for the tax-free transfer of assets between a parent or holding company and its subsidiaries. Additionally, holding companies may qualify for ‘dividend exemption’, whereby profit distributions received from their subsidiaries are exempt from UK Corporation Tax.
5. Attract new investors
Creating a subsidiary company in a different jurisdiction indicates that you are committed to doing business there.
This can make it easier to attract investment and funding, deal with suppliers and service providers in the region, and facilitate positive relations with local industries and authorities.
How to set up a subsidiary company in the UK
Subsidiary companies are usually formed as private companies limited by shares. To set up a subsidiary in the UK, you will need to follow the standard UK company formation process, just like you did when you formed your existing company.
You will require the following:
- company name
- registered office address
- Standard Industrial Classification (SIC code) to describe the company’s business activities
- at least one director
- at least one shareholder
- details of issued shares
- details of registrable ‘relevant legal entity’ (RLE) and any people with significant control (PSCs)
- articles of association
Your existing company, which will be the parent company, will be a corporate shareholder of the new subsidiary, holding all (or a majority) of the subsidiary’s issued shares.
However, UK companies cannot have only corporate directors. You will need to appoint at least one natural person as a director, either in addition to or instead of the parent company.
Since the parent company will own and control all (or a majority) of the subsidiary, it will also qualify as a registrable relevant legal entity (RLE) in relation to the company. An RLE is a corporate entity that would qualify as a person with significant control (PSC) if it were a natural person.
You can use ‘Model’ articles of association when setting up a subsidiary company, but you may wish to alter this default version to reflect the parent-subsidiary relationship and corporate structure.
Depending on the complexity of your business needs, it may be advisable to speak to an accountant or corporate solicitor before creating a subsidiary company.
Register a subsidiary online with Quality Company Formations
At Quality Company Formations, we have a selection of company registration packages suitable for setting up a UK private company limited by shares online.
Simply choose a company name, select your preferred package, check out and pay, and complete our online company registration form. Our resource centre provides detailed guidance on this 4-step company formation process and the information required to set up your company.
When you have completed the application, we will carry out a free pre-submission review before sending it to Companies House, where it will be processed and approved within approximately 3 to 6 working hours.
All of our packages provide a full set of company formation documents, statutory company registers with first entries, a free business bank account (optional), and access to our Online Client Portal.
Additional company services are also available, including a London Registered Office Address, Confirmation Statement Service, and a Full Company Secretary Service.
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Creating a subsidiary company is a major decision requiring careful consideration and planning. You should speak to an experienced accountant in the first instance, and you may also wish to take legal advice on how best to expand or re-structure your business operations.
With multiple companies, you will have to deal with additional administration, including statutory reporting obligations and more complex accounting and record-keeping requirements for both firms. There will be a great deal to organise and oversee, so you should think carefully about how the parent and subsidiary will be managed.
Nevertheless, a subsidiary company may be the ideal solution if you are looking to test out a new idea, diversify your products or services, or expand into new markets or industries.
If you have any questions or feedback, please leave a comment below. Our company formation team is also on hand if you need help to set up a company online.