As a company begins to achieve greater success, the possibility of growing the business may begin to emerge, with thoughts of expanding into new and foreign climates becoming a real possibility. When it comes to expansion, there are two options that best support this; creating a subsidiary or creating a branch.
In the following blog, we break down what subsidiaries and branches are, why businesses choose to create them, and the benefits and potential drawbacks of each structure, to help you understand whether a subsidiary or branch would work best for you.
Subsidiaries
What is a subsidiary?
A subsidiary refers to a company that belongs to, or is owned by, another company (often known as the parent or holding company). To be considered a subsidiary, the parent company must be the majority shareholder, owning more than 50% of the issued shares within the subsidiary.
Subsidiaries are separate legal entities from their parent company and are governed by the laws of the country in which they are incorporated. For example, if a parent company is based within the USA, but the subsidiary is incorporated within the UK, then the subsidiary would be governed by the laws of the UK, not of the USA. As the parent company is the majority shareholder, they do have considerable control and influence over the subsidiary company.
Why register a subsidiary?
Many companies choose to create a subsidiary company as a way of exploring new markets and opportunities, which may not align with the activities of the parent company, whilst still having the control and backing of an already established company.
Another reason, as already mentioned, is a subsidiary is a separate legal entity to its’ parent company. This offers protection in case of financial losses, as these will be solely associated with the subsidiary, and will not be transferred to the parent company.
Examples of famous subsidiaries
How to register a subsidiary within the UK?
Registering a subsidiary company within the UK is a straightforward process. Upon registering a limited by shares company, you provide the standard information; company name, SIC codes, officer information, addresses for the company.
When it comes to allotting shares and assigning shareholders, the parent company should hold at least 51% of the total shares, leading to the majority shareholding. This automatically means that this company is now a subsidiary of another. You will need the parent company name, registration number, and information regarding where the company is registered, and what governing body it must adhere to.
Branch
What is a branch?
A branch is an extension of an already existing ‘parent company’, often created in another country to give the business a physical presence within that country. It usually conducts the same business as the parent company, and, unlike a subsidiary, it is not a separate legal entity. The parent company is liable for all actions carried out by the branch company. All tax and legal obligations of the country in which the parent company is based apply to the branch.
Why make a branch?
Companies create branches as their business grows, to expand and have a physical presence in different locations, therefore becoming more accessible to their customer base. Branches are the most common way that larger corporations expand to multiple locations, either within the same jurisdiction, or worldwide.
Examples of companies with branches
How to register a branch in the UK
Opening a branch of a foreign company within the UK requires the parent entity to register as having a UK establishment with Companies House. This can only be done by completing paper form OS IN01, and posting this, along with the registration fee, to Companies House directly. As this can only be completed via post, and not online, it is a lengthier process.
You must also provide certified copies of the company documents, including the Memorandum and Articles of Association. These must be certified by a secretary or director of the company, permanent representative or administrator. If the documents are not in the English language, a certified translation must also be provided.
Before registering a branch, ensure that the proposed name of the company is available to use on Companies House. If it is considered the same as an existing company, an alternative name will need to be provided.
What are the benefits and drawbacks of a branches and subsidiaries?
Having established what a branch and subsidiary are, why they might be set up and the processes involved, what are the benefits and drawbacks of each company type?
Branch
Benefits
- The branch is a direct extension of the parent company, offering greater control.
- Branches are covered by the laws of the parent company’s country of origin, meaning easier administrative processes.
- A branch is much more recognisable as being an extension of the parent company, allowing customers to understand the company they are associating with, and allowing you to gain additional customers for your already established name.
- Closing a branch is much more straightforward than closing a subsidiary – relevant staff and Companies House must be informed of the closure.
Drawbacks
- Opening a branch is more complex and time consuming than opening a subsidiary.
- As an extension of the parent company, a branch does not have separate legal liabilities, meaning the parent company is responsible for all aspects of the branch, including finances and governance.
- Branches are not usually permitted to sponsor visas for employees, due to not being a local company, and may struggle to bring in overseas employees. Depending on geographical location, local recruitment may also be a struggle.
Subsidiary
Benefits
- A subsidiary is easy and quick to set up using the same incorporation process as a limited by shares company.
- As a separate legal entity, the parent company has limited liability when it comes to the actions of the subsidiary. Any financial loss is associated with the subsidiary and is not the responsibility of the parent company.
- Creating a subsidiary allows you to explore new markets or products in an alternative industry outside of the parent company’s current brand or activities.
Drawbacks
- A subsidiary not being wholly owned by the parent company gives rise to a potential lack of control with ownership shared between multiple shareholders.
- The governing laws and taxes of the country of registration need to be adhered to, increasing the administrative burden.
- A subsidiary is more complex to close, and the correct formal process must be followed to close the company. This includes informing all relevant parties who will be affected, notifying Companies House and HMRC and meeting the eligibility criteria for dissolution.
Whether a branch or subsidiary would work best for your company’s future is dependent on you and the individual needs and wants of your company.
At 1st Choice Incorporations, our friendly team are on hand to assist you with whatever your company needs. Contact us today to find out more information.
