If you own a small business, it is likely you’re interested in growth and development. In some cases, setting up a subsidiary company can enable your business to grow in ways it couldn’t before. If you think you would like to form a subsidiary company, please read on.
In this article, we will explain the pros and cons, and explore the process of setting up subsidiary companies from an English corporate law perspective. Small businesses shouldn’t be nervous about setting up a subsidiary company if it’s the right choice to help their company grow.
What is a subsidiary company?
A subsidiary company is an independent company that is controlled by another company. The other company is known as the parent or holding company. The parent company usually holds a majority of the subsidiary's shares, controlling its operations and decision-making.
The pros and cons of setting up a subsidiary company
The pros
- Limited liability – a key advantage is that a subsidiary functions as a separate legal entity, providing the parent company with a layer of protection as it doesn’t assume the liabilities of the subsidiary
- Strategic expansion – creating subsidiaries allows businesses to expand into new markets or diversify their product/service offerings without impacting the operations of the parent company
- Tax benefits – subsidiaries can benefit from separate tax structures, potentially leading to tax advantages for the overall group of companies (this can be beneficial to business operations and costs)
The cons
- Complexity in management – managing multiple companies requires effective communication and coordination between the parent company and its subsidiaries, especially when a company buys an existing company as a subsidiary (it's important to understand that different structures and management approaches can impact the development of a group)
- Costs – setting up and maintaining subsidiaries involve additional costs, including legal and administrative expenses (each subsidiary may also require its own accounting, audit, and compliance procedures, plus a registered office address in the country is irtrading in)
- Risk of contagion – while limited liability is a benefit, the reputation and financial troubles of one subsidiary can affect the entire group of companies
How to create a subsidiary company
1. Research and planning
- Identify the jurisdiction for setting up the subsidiary, considering legal and regulatory requirements
- Conduct a thorough market analysis to understand the business environment (are there any risks to setting up a subsidiary?)
- Consider your share capital structure, including the value of and number of shares
2. Legal structure
- Choose an appropriate legal structure based on the business entity's nature and goals (this is usuallya private limited company (ltd)
- Appoint directors and, if necessary, a company secretary
- At this point, consider how the parent company will impact the subsidiary, specifically determining which decisions company directors will make and which ones the holding company will make
- Consult with legal experts to ensure compliance with applicable laws and regulations
3. Registration
- Choose a name for your subsidiary company, and register the subsidiary with Companies House, providing the necessary documentation and statements
- You will need to register your company’s address as well as register for tax with the HMRC and possibly VAT depending on your expected turnover
- If your subsidiary is going to employ people, it will need to register as an employer
- Clearly define the relationship between the parent and subsidiary companies in the articles of association
4. Compliance and audit
- You should implement robust compliance procedures to adhere to local laws and regulations, this could include things like GDPR, health and safety and any industry-specific policies (it’s worth staying up to date with any changes in compliance regulations and how this can impact your company)
- Regularly audit to ensure transparency and accountability, and consult with one of our expert lawyers to prevent overlooking legal compliance on your group's path to growth
Speak to a lawyer about setting up a subsidiary
Examples of subsidiary companies
A well-known example of a company with many subsidiaries is Unilever. As a multinational consumer goods company, it has various subsidiaries focusing on specific product categories. Subsidiary companies include Dove, Magnum and Hellman’s. Larger companies can also acquire smaller ones, as seen in the case of Innocent Drinks, which Coca-Cola bought out in 2013.
FAQs about subsidiary companies
Can a subsidiary company have its own directors?
Yes, a subsidiary can have its own board of directors, but ultimate control lies with the parent company.
Is it necessary to audit subsidiary companies separately?
Yes, typically, each subsidiary must undergo a separate audit to ensure financial transparency.
Can a subsidiary operate independently of the parent company?
The parent company often influences major decisions and overarching strategies, although subsidiaries maintain autonomy.
Get legal support from LawBite
Setting up a subsidiary company in the UK offers a huge number of opportunities for small companies seeking growth. While it comes with its set of challenges, the benefits, including limited liability and strategic expansion, make it a great option.
With the right legal guidance and compliance measures, entrepreneurs can successfully set up and manage subsidiary companies, positioning their businesses for success in the global marketplace.
Setting up a subsidiary company involves legal processes and requires the services of an expert lawyer. If you’re looking to grow your business and need assistance in registering a subsidiary company, LawBite can provide a trusted and experienced corporate lawyer to support you. Our modern and efficient approach to business legal support means you can get an expert to help you every step of the way, at a fraction of the price
To speak to one of our expert corporate lawyers about setting up a subsidiary company, consider booking a free 15 minute consultation or calling us on 020 3808 8314.
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