If your goal is to grow your business through new markets you could set up a subsidiary company. This will keep things separate from the company that already exits.
There are other reasons why setting up a subsidiary could be beneficial. We’ll focus on three of those reasons in this blog.
How do subsidiary companies work?
A subsidiary company is a normal limited company. But it is one where at least another company has a controlling interest. This is often the case where parent companies want to sell to specific markets separate from their own.
For example, Associated British Foods is a retailer in food and has many subsidiaries. One of those is clothing company Primark. Its parent company operates in a very different market, so it makes sense to have a subsidiary that targets a different set of buyers.
If it were known under its parent company’s name it could create confusion. Also, it could make budgeting and finance issues more complex if it operated under its parent company.
Although a subsidiary is related to its parent company – known as a holding company – it is a legally independent entity. That means it has its own liabilities as well as tax and filing obligations. But the parent company remains in control and can influence the operations of the subsidiary.
3 reasons to set up subsidiary company
As we’ve already mentioned, some companies set up subsidiaries because their products sell in different markets. But there’s often more to it than that.
1. Diversifying and expanding into new markets
Selling into different markets can often lead to confusion or hesitancy from potential customers if you try to trade under your parent company. That’s when setting up a subsidiary can work. It also allows you to have a distinct presence and branding that suits the new market better.
Some companies sell products that work in more than one industry. For example, we have a case where a company selling to the pub and hospitality industry could sell some of its equipment to the dairy industry. But with different markets and a clear brand for the pub industry, setting up a subsidiary was the most sensible option.
Setting up subsidiaries is also useful if you’re planning to operate in overseas markets. Having a subsidiary in each location allows you to create a presence that is tailored to that market’s regulations and operating bodies.
2. Manage risk and liability
As a subsidiary company is legally separate from a parent company, any financial risk is taken by the subsidiary. If it becomes insolvent or has any legal issues, the parent company is widely protected. In many cases it will not be held liable.
This helps limit the parent’s exposure to risks and liabilities and won’t affect the daily running of its operations.
In the example above, the equipment maker did not want to risk its successful business in the pub and hospitality sector be affected by starting up in the dairy industry. The directors were new to that market and knew they were more exposed to risk than in the sector they’d worked in for 30-plus years.
3. Tax reasons
Setting up a subsidiary helps both companies lower Corporation Tax (CT) rates. That’s because there is no longer a flat rate of CT. Instead, the rate increases proportionally from 19-25% on annual profits between £50,000-£250,000.
If you’re entering a new market, you may make a small profit of just £10,000 that pushes your business into a higher rate of tax. But if you set up a subsidiary for a new market, that profit won’t affect the parent company or its tax liability.
You might also be able to claim group relief. This offsets the losses in one company against the profits of the other in the same accounting period.
Manufacturers are also able to set up their operations in a new country with more favourable tax rates without affecting the parent company’s activities in the UK. And there is also ‘tax-free transfer of assets’. This allows the assets of a parent or subsidiary to be moved either way without attracting taxes.
How can we help?
If you want to set up a subsidiary company or are thinking about it and not sure it’s right, then we can help. Contact our team today to talk about your plans. We love to help businesses grow and help business owners meet their goals.
