Managing Subsidiaries: Legal Guidelines for Small Businesses

A subsidiary is a limited company controlled by an existing company, often known as the parent or holding company. The parent company typically owns more than 50% of the shares or voting rights in the company (a controlling interest). Businesses must understand the legal guidelines and frameworks when setting up and managing subsidiaries to maximise their advantages while avoiding and managing any potential risks and liabilities. 

Why Establish a Subsidiary? 

The key aspect of a subsidiary is that it is a separate legal entity with its own liabilities. By creating a subsidiary, you can silo liability within the business and isolate risks. The parent company’s liability should be limited to the amount it invests into the subsidiary unless it provides a corporate guarantee or enters into third-party contracts. 

The main disadvantage to creating subsidiaries is that there is added oversight and increased complexity in management. 

Choosing the Right Business Structure

There are multiple business structures for subsidiaries, so choosing the one that is best for your business is essential. The two most common structures for small businesses are wholly-owned or majority-owned subsidiaries. 

Wholly Owned Subsidiary

Under this structure, the parent company owns 100% of the shares or voting rights in the subsidiary. The key advantage of this structure is that you retain complete control over all operations and decision-making in the subsidiary. 

One key disadvantage is the potential for conflicts of interest. As a shareholder of the parent company, you may prioritise the parent company’s interests over those of the subsidiary, which could lead to conflicts of interest, particularly in your position as a director of both companies. 

Majority Owned Subsidiary

Under this structure, the parent company owns 50% or more of the shares or voting rights in the subsidiary. This structure clearly has the advantage of allowing the parent company to retain control over the company’s operations, decisions, and appointments while benefiting from additional investment and expertise from minority shareholders. 

However, there may be potential conflicts with minority shareholders. The parent company must still consider the rights and interests of the minority shareholders in the subsidiary, and some decisions may require their consent or approval.  

Compliance and Regulatory Requirements

As with all UK companies, you must adhere to some additional company law and regulatory requirements to avoid being fined. 

Corporate Governance and Reporting Obligations

The company must be registered with Companies House. Once this is done, you must maintain proper corporate records, such as filing changes to the company’s name or articles.  

It is also essential to keep on top of reporting obligations. These may include notifications of the appointment, resignation or termination of directors and any allotment, transfer or redemption of shares. You will also need to hold annual general meetings for the subsidiary. 

Company Registers

When you incorporate a company in England and Wales, you must maintain a number of company registers at its registered office or at the Companies House. This template includes these company registers.

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Your business must also ensure the business complies with various corporate laws and regulations, such as the Companies Act 2006, the Data Protection Act 2018, and the UK GDPR. 

You must be aware of any regulations specific to the subsidiary’s industry. For example, if the subsidiary operated in the healthcare industry, you would need to ensure that you had all the necessary certifications and professional licences and that the products or services you provided met quality and safety standards. 

Managing Risks and Liabilities

Proper documentation and contracts can help you manage the risks and liabilities within your subsidiaries. You should properly document all agreements, contracts, and transactions between the parent company and the subsidiary. The documents should clearly define each entity’s roles, responsibilities, and liabilities. 

Liability can be separated between the parent and subsidiary companies by clearly separating assets and liabilities between each entity. You can also put valuable assets, such as intellectual property, into the parent company to add a layer of protection for these assets from the operating entities. 

Key Takeaways

Setting up a subsidiary can be a great way to grow and strengthen your business, but you must be aware of multiple considerations. The first is which type of subsidiary to create. The second is to ensure your subsidiary complies with the necessary regulations. The third is to establish practices and processes to manage risks and liabilities.

If you need help with subsidiary companies, our experienced contract 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.

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