Subsidiary company – a small business guide

When you’re looking to expand your business, there are few different routes you can take. Perhaps you’re passionate about what you do and want to keep investing your time, energy, and money into that.

But there’s also a specific type of entrepreneur who’s always looking for their next challenge – no matter how related it is to their current company. If that sounds like you, then perhaps you’re debating setting up a subsidiary company. Keep reading to learn more.

What is a subsidiary company?

A subsidiary company is a business which is owned (and controlled) by another. Subsidiary companies can be formed in different ways: you could launch a new business under your existing company or even buy out another business and bring it into the fold.

No matter how your subsidiary company is born, it’s still considered a separate legal entity to your other business. It will have its own finances, tax liabilities, and regulations to follow. However, it’s likely that as a subsidiary company, it may still be under some control of the business it sits under.

A subsidiary company will always sit underneath another business – either a parent company or a holding company.

A parent company is a company which controls one or more subsidiary companies. It can be a partial or complete owner, only needing to own a majority share in the company to have control. Parent companies typically have their own business ventures and may acquire subsidiary companies to aid their growth or take control of the market.

Alternatively, a holding company is a company that exists only to acquire subsidiary companies. Its sole purpose is to invest in subsidiaries and it doesn’t produce any goods or services of its own.

Find out more about setting up a holding company in our guide.

It’s important to note that subsidiary companies are typically set up as limited companies, which come with less financial and legal liability than being a sole trader.

Benefits of setting up a subsidiary company

There are a few benefits when it comes to setting up a subsidiary company of your own. We’ve listed a few below to help get you thinking about whether it’s the right choice for you.

Less liability

One of the main benefits of setting up or acquiring a subsidiary is that the parent or holding company has less liability if things weren’t to go so well. A subsidiary company is its own legal entity, so the parent company won’t incur any of its losses – even if it has the majority share.

Maintains your brand

If your new business venture is quite different from your current business, you may be worried about maintaining your brand identity.

Different brands will require different business plans and marketing strategies and may have different customer perceptions. So keeping your companies separate can be a great decision both internally and externally.

Disadvantages of setting up a subsidiary company

However, there’s also some potential disadvantages to consider when setting up a subsidiary.

Less control

As discussed, whilst not being in full ownership of a company can be a good thing when it comes to liability – it also means you may have less control over the business. Depending on the amount of shares you have in the subsidiary company, you may not have as much control as you’d like.

It’s complex

Each business will have its own rules, regulations, and structure. From managing finances to the work culture, running one or more subsidiary companies is far more complicated than running just one business.

You’ll need to have a really clear business structure for each of your companies in order to succeed. Creating a strong vision statement and mission statement can be a good starting point.

Subsidiary company examples

Many famous companies you might have already heard of are subsidiary companies. If you’re looking for some business inspiration, or even that extra push to take the first step to acquiring a subsidiary, check out this list of famous businesses and their subsidiaries:

• social networks Instagram and WhatsApp are subsidiaries of Meta
• film studios Pixar and Marvel are subsidiaries of The Walt Disney Company
• Google is a subsidiary of Alphabet Inc. – but Google even has its own subsidiary companies like Android and YouTube
• UK media company Sky Group is a subsidiary of the American company Comcast
• confectionery company Cadbury is owned by Mondelez International

Audit exemption for subsidiary companies

When you run your own business, you may need to occasionally get an audit of your accounts. A subsidiary company must have an audit unless it qualifies for an exemption.

One possible audit exemption is if your subsidiary is considered a dormant company, which is when you have no ‘significant accounting transactions’ during the audit accounting period. You can find out more about audit exemptions of subsidiary companies on the government website, including information on how to claim an exemption.

Should you start a subsidiary company?

Ultimately, the decision to start a subsidiary company is up to you. You should consider the financial and legal implications, such as tax regulations and liability – but also what works for you on a more personal level. If you want more separation between your businesses or are looking to work with multiple shareholders, a subsidiary company is a good option.

If there’s an existing company that you’re interested in purchasing, you could also consider a business merger or acquisition.

No matter what you decide, it’s important to consult with a financial advisor or someone who knows the specifics of your company.

Do you own a subsidiary company? Let us know how you find running multiple businesses in the comments below.

More guides for starting a small business

• Business name ideas – how to do a UK trademark search
• What is intellectual property?
• Sole trader or limited company – what’s the difference?
• Is business insurance a legal requirement?

Photo: Jacob Lund/stock.adobe.com