The answer to this question is, it depends; on what your existing company is, what your plans for your new subsidiary company are, and how quickly you think the idea will get out of the starting blocks.
In short, there is no definitive right or wrong approach, but a series of trade-offs to navigate when it comes to the best route for your business.
That said, there are definitely factors that make it easier to decide the which approach is right for you.
Setting up a new company
Setting up a new company based on your new idea can be a sound decision. It makes it a lot easier to keep the new project at arm’s length from your current activity. It also separates the liabilities so that if your new company has any financial issues, your existing business will not be impacted and forced to carry them. The advantages of starting a business as a company – as opposed to a subsidiary offshoot – are that there is more credibility associated with having your own company. If it is its own company, it is far easier to raise large sums of money for the business or sell part of the business.
Depending on the size on structure of your company, you may also be able to benefit from entrepreneurs’ relief if you sell the company. This comes back to the question of what is your endgame of this business? If you are looking to grow something to sell, a separate company could be the right way to go.
Downsides of setting up a new company
The main downsides to setting up a new company are cost and complexity. The cost element is straightforward, an extra company means extra running costs, extra accountancy fees, extra business admin costs, and far more complexity when it comes to both day-to-day running and annual returns.
Tax and legal implications
Although you as the owner are the link between the two, there are now barriers in place which can make cash flow and transferring assets between the companies an issue. Intellectual property is a good example. If IP being transferred between companies is deemed to have a monetary value, it incurs a tax bill. It isn’t necessarily an issue, but if the IP for your new idea is held by your existing company, it is worth considering the legal and tax implications when deciding the timeline for setting up your new company.
What is a subsidiary company?
A subsidiary company is a company owned or controlled by a holding or parent company.
In the UK, the parent company holds a majority interest in the subsidiary company. It controls more than 50 per cent of the subsidiary’s stock and has the majority of voting rights. Subsidiaries can be formed when one company buys another or is formed by the parent or holding company. A subsidiary company is a separate legal entity from its parent for the purpose of tax, regulation and liability. Therefore, the subsidiary company is exposed to most of the risk of being sued and is a separate legal entity from the parent company.
Benefits of a subsidiary company
First and foremost, it limits the parent company’s liability, which won’t be responsible for incurred costs such as legal fees or financial compensation. While the parent company still has majority control over the subsidiary business, it is not liable for the businesses losses, which provides a safety net for the parent company and allows losses and other issues to be contained and managed efficiently.
New company versus subsidiary
Deciding what your end game is crucial to working out if and when setting up a subsidiary is the right route for you and your company.
The benefits of keeping your new idea within the current business are that it can be a low-risk test bed to see if your idea has legs.
You can work on a prototype to see if there is an MVP in your idea ahead of investing the time and effort into setting up a new company. It all depends on your vision for the project, if it is a long-term complementary product or an added service for your existing business, and whether you aren’t planning to sell or raise investment for it. Creating a sub-brand within your company may be the most cost-effective route forward.
Starting a subsidiary company
The most common form of company for a UK subsidiary is the private limited company (ltd), and setting up an ltd company involves going through the standard UK company registration process and applying to Companies House for incorporation.
Incorporation is the process by which a new or existing business is formed as a company. A company formation agent, solicitor, accountant or chartered secretary can, for a fee, carry out the process. Alternatively, a limited company can be registered online using Companies House web incorporation service.
There will be a considerable amount of documentation required regarding shareholders and the director, which, once submitted, will be reviewed by Companies House, and a decision will be made as to the subsidiary’s incorporation.
The company will need at least one named director and a registered office address within the subsidiary’s country. This means that if you are setting up a subsidiary in the UK, but the parent or holding company is registered overseas, you will need a valid office address in the UK for the subsidiary.
All UK limited companies must prepare and file annual accounts. If the company is over a certain size – if its turnover exceeds £10.2 million or its balance sheet exceeds £5.1m or it has more than 50 employees on average – it must also have an annual independent audit.
Directors are personally responsible for submitting yearly accounts and the company’s annual return to the Registrar of Companies. Penalties are payable in the event of non-compliance.
Upon registration of a new company, Companies House will pass on the details to HM Revenue & Customs (HMRC). The company will also need to contact its local HMRC office within three months of formation.