Due diligence checklist – buying a business

Creating a subsidiary company can be a good option for businesses looking to grow and expand into new business markets or sell new products or services that differ from their core offering.

What is a subsidiary company?

A subsidiary company is one that is owned and controlled by another company, known as the 'parent' or 'holding' company.

A subsidiary business can be formed by a parent or holding company or when one business buys out another.

A subsidiary is an independent legal entity, typically formed as a limited company, with its own tax liabilities and regulations.

What is a parent company?

A parent company is its own business and trades separately from its subsidiary company.

The parent company generally owns at least 51% or more of the subsidiary business and has control over it.

If the parent owns the whole subsidiary, the subsidiary is referred to as 'wholly owned'.

A parent company can own subsidiaries overseas in different locations, and subsidiary companies do not have to be in the same industry or line of business.

What is a holding company?

A holding company is a business that doesn't trade itself, but is formed with the sole purpose of owning subsidiaries.

Why do companies create subsidiaries?

Businesses create subsidiaries for many reasons.

If your business acquires another business that already has its own reputation and brand identity, creating a subsidiary business for the new company allows it to retain its existing customer base and established reputation.

Other reasons to start a subsidiary may include launching different products or exploring other markets to grow their business in a different direction without affecting the parent company's reputation.

Looking to grow your business? Read our guide to business growth.

Benefits of starting a subsidiary business

Limits parent company liability

As a subsidiary company is its own legal entity, any losses it incurs are not transferred to the parent company.

The parent or holding company also holds the subsidiary's assets, so those assets are protected if the subsidiary company faces losses.

New opportunities

Creating subsidiaries can potentially offer a range of marketing and business opportunities.

It allows a business to develop new brands and market to new audiences, allowing new products and services to launch with any existing association with the parent company.

Expand into new markets

Creating a subsidiary company can be a good way for your business to expand into other regions and countries.

It allows the individual subsidiary to cater for local customers and adhere to local financial and legal regulations.

Access to resources

Owning a subsidiary can allow flexible access to resources.

Assets and resources between a parent company and subsidiary can be shared, potentially saving money through resource pooling.

It's also not limited to the property or physical assets.

The separate companies can share financial and marketing expertise, allowing both to benefit from insights and knowledge that can be shared between them.

Increased business efficiency

Creating one or several subsidiaries can give the parent company a more effective process framework.

Each subsidiary can work together, streamlining various processes.

Your business can be divided into smaller companies that are more effectively managed, such as one subsidiary focusing on consumer sales, while a separate subsidiary focuses on business-to-business sales.

Raise funds

Starting a subsidiary means you can offer shares and investments without affecting the stock value of the parent company.

Tax benefits

A parent or holding company may enjoy various tax benefits, such as capital gains tax exemption – exemption of dividends received from subsidiaries in most countries from taxation in the UK.

Holding companies may be able to deduct interest on loans to help finance their subsidiary businesses and may be able to defer taxes on their profits.

Learn more about essential tax reliefs for smaller businesses.

Disadvantages of starting a subsidiary business

Management challenges

The parent company may find managing its subsidiaries a challenge.

It can be time-consuming and difficult to oversee subsidiaries, particularly if some are based overseas.

Running costs

One of the main disadvantages of setting up a subsidiary company is costs.

In addition to the extra day-to-day running and staff costs, you may have to factor in additional costs associated with running a limited company, such as accountant and legal fees.

Limited control

If the parent company does not wholly own the subsidiary, it may partially belong to another business.

This shared control can make decision-making and management a challenge.

Key decisions may have to be decided through agreement with all shareholders.

Legalities

Owning a subsidiary can be legally complex if multiple companies own a share, such as determining ownership of assets, intellectual property, and any compliance risks investors are exposed to.

If based in different countries, it's essential to ensure laws and regulations of the country or state are fully adhered to.

Discover how smaller businesses can protect their intellectual property.