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Whether you are starting out in business or running an existing business, you may have thought about setting up subsidiary companies. Subsidiary companies can be useful for many reasons. For example, you might want to carve out specific parts of the larger business, minimise risks, and protect key assets of the larger business, such as its intellectual property. Therefore, it is important to know what a subsidiary company is and whether multiple companies can own a subsidiary company.    

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What is a Subsidiary Company?

A subsidiary company is a company that is owned by another company. Broadly speaking, this is also described as a parent-child relationship. The company controlling the subsidiary is the parent company and the subsidiary company is the child company. 

The parent company can have multiple subsidiaries (or child companies), which are all accountable to the parent company. Generally, you can do this in an ultimate holding company structure. This is where the parent company (or holding company) holds 100% of the shares in the subsidiary companies.

Notably, there are strict rules for determining when a company is a subsidiary company. These include whether the parent company:

  • controls the makeup of the board of directors of the subsidiary company;
  • controls more than half of the votes at shareholders meetings of the subsidiary company;
  • holds more than half of the shares of the subsidiary company; or
  • has entitlements to receive more than half of the dividends issued by the subsidiary company.

Satisfying any one or more of these criteria means that the company is a subsidiary company.   

Why Would I Use A Subsidiary Company?

Creating subsidiary companies is a common business practice. Likewise, there are several reasons why companies use subsidiaries. For example, companies that wish to start a new business venture as part of a broader (but related venture) may choose to set up a subsidiary company. As the subsidiary company is its own separate legal entity, the risks of the new business venture remain within the subsidiary company. You are also able to take advantage of any resources, key assets and intellectual property of the parent company.   

Additionally, businesses can use a subsidiary to protect their valuable assets. A parent company will typically hold all of the business’ valuable assets. Meanwhile, the subsidiary company takes on the risks and operational matters such as entering into contracts. This could lead to business growth as the operating company can take on more business risks knowing that the holding company can protect certain assets.  

Before setting up a corporate structure including subsidiary companies, it is best to seek advice from a lawyer. There have been cases where parent companies are held to be responsible for the debts of their subsidiaries. This is common where the parent company owes a duty of care to the subsidiary’s creditors. To this end, it is important that contracts correctly identify the subsidiary as the one entering into the contract. Likewise, ensure you put in place documents showing the transfer and use of assets between the parent and subsidiary companies.

It is also important to seek accounting advice before setting up or changing the structure of your business. If you have an existing business, there may be tax consequences of transferring and using assets from one company to another.    

When Can a Subsidiary Company Have Multiple Company Ownership?

A subsidiary company can have multiple companies own its shares, provided that the parent company (if you want it to continue acting as a holding company of that subsidiary) controls at least 51% of the shares in the subsidiary. It is possible that other companies hold the remaining 49% of the shares. However, these shareholders will be minority shareholders in the subsidiary and will not be deemed “holding companies” of the subsidiary. 

Due to the assets of the subsidiary company not being as valuable as its holding company, it is unusual for subsidiary companies to have multiple companies own their shares. If a business has a clean dual company structure (where the holding company holds all of the shares in its subsidiary company(ies)), this is attractive to investors in a capital raising scenario. Hence, by purchasing shares in the holding company, the investor benefits from ownership of the entire group. 

Key Takeaways

A subsidiary company is an entity that has a parent company (also known as a holding company) that owns at least 51% of its shares. The most common arrangement involving subsidiary companies is an ultimate holding company structure. This is where the parent company owns 100% of the shares in all of its subsidiaries. However, it is possible for multiple companies to have a minority shareholding in the subsidiary. You must ensure that these shareholders do not obtain more than 49% of the subsidiary company.            

If you need help managing your corporate structure, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

Frequently Asked Questions

Do I need to have an ultimate holding company structure?

While having an ultimate holding company structure can minimise risk for your business, it is not necessary to have one. The answer to this question may also be tax-driven and depend on the size of your business. As such, it is essential to check this question with your accountant and your lawyer. If your business is relatively small and does not have many valuable assets, then the structure may not be needed. In contrast, if your business has valuable assets and takes on a lot of risks, it is likely to be worthwhile to put this structure in place.

Can I issue dividends to the shareholders of my subsidiaries?

Yes, any profits earned by the subsidiary can be issued to the shareholders (whether this is your holding company only or various shareholders) as dividends. However, this is subject to certain approval requirements under corporate law. 

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