It is often helpful for a business to divide up their assets and liabilities by creating new companies. This can be an effective way of limiting financial liability. The business can use this opportunity to diversify its branding and bring variety to its services. To achieve this goal, the business owner can create a subsidiary company.
A subsidiary company is typically owned or controlled by its parent company. The parent company is considered to have control or ownership of the subsidiary company if:
- it can name or dismiss the majority of directors in the subsidiary company, or
- it can cast over fifty percent of the shareholder’s votes in the subsidiary company, or
- it owns more than half of the shares of the subsidiary company
The amount of control a parent company will have over its subsidiary company will depend on the clauses specified in the documents governing the subsidiary relationship. The parent company can reserve powers relating to certain matters such as the nominating of Chief Financial Officers or the purchasing of certain assets.
Sometimes the parent company exerts so much control over the subsidiary company it is virtually acting as a director of the subsidiary company. In this case, the parent company could be held liable for the subsidiary’s debts like any other officially named director. Therefore, it is key for the subsidiary company to be directed by its own board that makes decisions independently.
Advantages of setting up subsidiaries
Many businesses have components with varying specialties that are based in different locations. Creating subsidiary companies for each of the unique parts of a business can be attractive to many business owners.
For example, if a business owner opened up two restaurants, they could create subsidiaries for each of the restaurants. Each subsidiary company will be accountable for the assets and liabilities of each of the restaurants. If one restaurant begins to struggle financially, the other restaurant would not be affected. The external creditors would not have any claims over the other restaurant as it is under a distinct subsidiary company. However, if the other restaurants provided a guarantee for the struggling restaurant, it would become liable for any debts incurred. The subsidiaries will also be considered individually for tax purposes.
What is the difference between a branch and a subsidiary?
A subsidiary is generally a separate legal entity while a branch isn’t. Things that you would take into account when you decide on which one to set up include how you wish to share the liabilities as well as how you wish to file your tax returns.
How do I set up a subsidiary company?
A subsidiary company should be formally registered with ASIC in compliance with relevant regulations. The business structure should reflect any business objectives in the long run. To set up the subsidiary, you would need the following things:
- An ABN (Australian Business Number)
- A new company name
- An ACN (Australian Company Number)