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As a business owner in England and Wales, you will want to make sure that you are familiar with the different possible business structures. One example of a structure is a ‘parent company’ structure. This applies if your company is:
- in control of other smaller companies; or
- controlled by a larger company.
Understanding corporate structure when separate companies are involved can help you deal with legal liability and risk management. This article will explain some of the key points and implications of having a parent company.
What is a Parent Company?
A parent company is a company which has a controlling interest in a subsidiary company. This means it can control the subsidiaries day to day operations if it wishes to.
Parent companies are often also conglomerates. A conglomerate is a multi-industry company that usually operates as different business entities within different sectors. This allows the parent company and its subsidiaries to benefit from each other’s:
- resources;
- brands;
- staff; and
- business strategies.
How Do Parent Companies Work?
Parent companies work by acquiring enough shares in a smaller company. By doing this, they give themselves majority voting rights, otherwise known as a controlling interest. Often, this happens when the parent company has control of over 51% of the other company’s stock.
When the parent company has a controlling interest in a smaller company, it can choose to involve itself in the company’s operations or take a hands-off approach. Having active control over daily operations can have benefits if the overall project is to make the company more profitable. However, the parent company may also acquire a smaller company to eliminate potential competition.
If a company acquires a smaller company for this reason, there may sometimes be competition law concerns. In England and Wales, the Competition Markets Authority (CMA) is the competition law ‘watchdog’. The CMA is therefore responsible for making sure that the market remains competitive and fair. As a result, if you are looking to acquire a smaller company operating in the same industry, your legal team should review your decision. This can mitigate and manage the risk of any action from the CMA.
Further, parent companies may also create ‘spin-off companies’ instead of acquiring existing ones. This is where the parent company will create a new subsidiary company. The shareholders of the parent company will then get a stake in the new spin-off subsidiary company.
Some notable examples of parent companies include Alphabet and Facebook.
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How Are Parent Companies Different From Holding Companies?
A holding company and a parent company are similar in many ways. These terms are sometimes used synonymously. However, a holding company is different in that it will not involve itself in its subsidiary companies’ operations at all. The purpose of the holding company is only to control its subsidiaries, and so it does not provide a product or a service in any way. Holding companies can often benefit from certain tax benefits. A personal holding company is another variation which you may come across. A personal holding company is a corporation which must have 5 or fewer owners. This type of company will bring income to its owners from investments and property ownership.
A parent company, on the other hand, usually has its own projects and operations, and it will also usually provide a product or service to customers.
Why Use a Parent Company?
Being a parent company, or having your business be a subsidiary to a parent company, can be a good way of delineating between the different aspects of a business. It can be good for trading resources, expertise, and workers.
In addition, because the parent company and the subsidiary companies are not one single company, the competition watchdog will treat them as separate legal entities. This is useful for risk management because it means that the companies will not be liable for each other’s debts or insolvency.
Key Takeaways
As a business owner in England and Wales, you will want to familiarise yourself with the different corporate structures that your business can take. This is especially relevant if you want to acquire (or be acquired by) another company. Some common positives of having a creative corporate structure include having certain tax benefits, as well as an easier to manage different brands, products, and industry market shares.
Finally, it is also worth keeping in mind what the distinction between a parent company and a holding company is. While in practice they will often have the same function, a holding company will not offer products or services, nor will it have any operations of its own. A parent corporation, on the other hand, will usually have its own operations separate from its subsidiaries.
If you have any further questions about parent companies, our experienced business 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 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A parent company is a company that owns subsidiary companies. The parent company is effectively treated as a distinct legal entity from its subsidiaries.
A holding company is similar to a parent company, with the main distinction being that a holding company typically does not offer its own product or service to customers.
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