A subsidiary company is a limited company that’s owned by a bigger parent company (sometimes also referred to as a holding company, under certain conditions). The parent/holding company will usually need to own more than 50% of the smaller company’s stock for it to be seen as a true subsidiary.
Subsidiary companies usually exist in two key scenarios:
- When a Company A buys Company B and adds this business as a subsidiary company within its group structure.
- When there’s a business reason for a parent company to create a subsidiary company within its group structure.
In scenario 1, a parent company can have one or more subsidiaries that are all part of the same group. The parent company has full financial control and oversight of the management of each subsidiary business. The advantage of the subsidiary structure is that it allows the parent company to limit its liability – if the subsidiary is sued, for example, the parent company isn’t directly liable.
In scenario 2, a ‘holding company’ is sometimes set up to control the stock and assets of one or more subsidiaries, where this holding company has no operations of its own – it exists purely as a business structure to manage the subsidiaries.
This is a common set-up if you have property in the business. A holding company will be set up to protect the assets of the properties in your portfolio, with a separate subsidiary company created for every property. Again, this helps to limit the liability of each property.
When you need a subsidiary
You only need to consider setting up a subsidiary if there’s a sound business reason for limiting the liabilities of your existing or new company. These could include:
- Limiting your liability as a parent/holding company – as per the property example.
- Making your group structure more tax efficient – for example, by separating each company’s profits and tax liabilities.
- Creating a clear distinction between two businesses in your group that work in different industry sectors – for example, creating a subsidiary for a catering business that separates it from your food manufacturing business.
If you want to know more about setting up a holding or subsidiary company, give us a call on 01454 300 999 or drop an email to firstname.lastname@example.org