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In the commercial world, we commonly hear the terms subsidiary and branch used interchangeably. However, there is a legal distinction between the two. Therefore, if you own or manage a company, you should ensure you understand the difference between the two. Generally, a subsidiary refers to one company that is legally distinct from another company but which is wholly or partially owned by that other company. On the other hand, a branch does not necessarily refer to separate companies. It might refer to different offices or locations of a single company. This article will explain the difference between a subsidiary and a branch in more detail.
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What is a Subsidiary?
Subsidiaries are common in the business world, especially for large businesses. To understand how the law defines a subsidiary, suppose there are two separate companies: 123 Ltd and ABC Ltd.
Imagine that ABC Ltd owns all the shares in 123 Ltd. In this case, the law refers to 123 Ltd as the subsidiary and ABC Ltd as the holding company. This is also the case if any of the following apply:
- ABC Ltd owns a majority of the shares with voting rights in 123 Ltd;
- ABC Ltd has the right to appoint or remove a majority of 123 Ltd’s directors (regardless of if it owns any shares in 123 Ltd); or
- ABC Ltd is one of 123 Ltd’s shareholders (among others) and has a private agreement with the other shareholders, giving it a majority of voting rights in ABC Ltd.
Therefore, if ABC Ltd owned 51% of the voting shares in 123 Ltd, ABC is the holding company, and 123 Ltd is the subsidiary.
You may hear subsidiaries referred to as undertakings. Where there is at least one subsidiary and a holding company, the law refers to the two companies together as a “group of companies” or simply a group. In practice, many refer to such companies together as a corporate group.
Holding Companies and Parent Companies
As we saw above, a holding company has a strict legal definition. Of course, it is possible for a holding company to itself be a subsidiary of another company. Again, this is quite common for larger businesses. It is not uncommon to see a chain of a dozen companies, with one as the ultimate subsidiary and one as the ultimate holding company.
We commonly call the holding company “at the top” of the chain, the parent company. However, as with the term “branch”, a parent company does not have a strict legal definition. Although, in most cases, it is obvious which company is the parent company and which are the subsidiaries.
What is the Purpose of Subsidiaries?
Subsidiaries allow a single business to section off different aspects of its operations into separate companies. The main benefit is that despite being part of the same group, each company retains its own limited liability. This means that the holding company is not directly responsible for the subsidiary’s debts and vice versa. Accordingly, this limits the entire business’ risk as a whole.
Reasons that businesses make use of subsidiaries include:
- opening in new markets;
- raising finance;
- separating valuable assets (or pooling them together);
- granting security to a bank; and
- accounting and tax treatments.
What is a Branch?
A branch commonly refers to a business with operations in different physical locations and markets. In particular, we commonly see the term branch in reference to businesses with operations in more than one country. For instance, a UK-incorporated company may decide to expand its operations to the Netherlands. When it opens up an outpost in the Netherlands, it may refer to this as its Dutch branch.
Unlike the term subsidiary, the law does not define the term branch as strictly. That is, there is no hard and fast definition of what constitutes a branch. However, in some cases, particularly concerning retained European Union law and competition law, a branch can refer to an establishment in another country or EU member state, which may have a definite legal meaning.
In practice, a branch may or may not be a subsidiary. That is, it may not necessarily refer to a distinct legal company. There are many reasons why a branch would be a subsidiary, related mainly to limiting the entire business’s liability. However, at least under UK company law, a company is free to open an office in another location or country without having to incorporate a new company. However, the position might be different in another country or EU member state.
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Key Takeaways
A subsidiary is any company whose shares are owned by another company. A branch does not have any strict legal meaning but usually refers to one particular location of a business that operates in more than one region.
If you need further guidance or would like to create a subsidiary company, 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 at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
If your business is ‘established’ in the UK, you must register with the body governing incorporated businesses in England and Wales. For example, if you have an office or premises where your business regularly operates, this will likely constitute an establishment.
If you incorporate a foreign business in the UK, you will create a new legal entity independent of the foreign business. It will have debts and own property. It will be a subsidiary of the foreign business (called a parent company).
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