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What is a subsidiary company?

Does setting up a subsidiary make sense for your business? While it isn’t a decision that you should take lightly, there are a wide range of advantages associated with creating a subsidiary company, including the ability to limit your potential financial liability. Find out a little more about how to set up a subsidiary company with our comprehensive guide. First off, what is a subsidiary company?

Subsidiary company meaning

A subsidiary company is a business that is owned, either partially or completely, by another company. This company is referred to as a parent company (if it has other business operations) or a holding company (if the sole purpose of the company is to own its subsidiaries). There are many different reasons why you may wish to set up a subsidiary business, including diversifying your business, limiting your financial liability, and keeping your company’s brands distinct from one another.

How does a subsidiary company work?

Subsidiaries are separate and distinct from their parent companies, although naturally, the parent company is likely to have a considerable level of influence on the subsidiary business, including seats on the board. Having said that, subsidiary companies may have independent liabilities, assets, and corporate governance, and if the subsidiary is based in a different country to the parent company, the subsidiary company will need to follow the laws and regulations of the country in which it is incorporated and operational.

Pros and cons of a subsidiary business

There are many benefits associated with registering a subsidiary company. Firstly, it limits liability and means that the parent company isn’t on the hook for certain costs, such as legal fees or financial compensation. So, while the parent company will still have full control over the subsidiary business – if they maintain over 50% of the stock – they won’t be liable for the business’s losses. That’s an enviable position to be in and means that corporate problems are much easier to contain and limit.

It’s also important to note that registering a subsidiary business can also help to simplify the division of your company. If you’re undergoing a global expansion, for example, splitting your company into subsidiaries can help you navigate the different legal and financial systems present in different parts of the world. In other words, each local subsidiary can maintain its own corporate and managerial culture while linking back to the overall parent company.

However, there are some drawbacks to consider. If the subsidiary business is partially owned by other entities, then the parent company may experience control issues with the subsidiary. It’s also important to note that consolidating the financials of a subsidiary company can be a complex task, and the legal paperwork can end up being very costly for your business. You should also consider the greater bureaucracy that is likely to result from multiple subsidiaries within the same overall business structure.

How does accounting work for a subsidiary company?

As we mentioned, accounting for a subsidiary company can be a complicated undertaking. Because subsidiaries – purely from an accounting standpoint – are separate companies, they need to maintain independent financial records, bank accounts, and so on. In addition, any transactions between the subsidiary business and the parent company need to be recorded. After the subsidiary has prepared their financial statements, they’ll need to be sent to the parent company where they’ll be consolidated into a group account. It’s worth engaging the help of an accounting professional, if you haven’t already done so, to help you navigate the process of accounting for a subsidiary business.

How to set up a subsidiary company

Now that you know more about subsidiaries, let’s take a more in-depth look at how to set up a subsidiary company. In the UK, setting up a subsidiary company is a relatively simple process. You can simply go through the standard UK registration process for setting up a new company and apply to Companies House. You’ll need at least one named director, a registered office address, as well as several important documents, including the Articles of Association. After the subsidiary has been set up, your business will have to start providing statutory accounts to Companies House, while you’ll also need to register for corporation tax.

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