Contents
- What is a Subsidiary Company?
- How Does a Subsidiary Company Work?
- Benefits of Establishing a Subsidiary Company
- Difference Between a Subsidiary and a Branch
- Why Register a Subsidiary Company in Australia
- Steps for Establishing a Subsidiary in Australia
What is a Subsidiary Company?
A subsidiary is a company that functions independently but is owned predominantly by another entity, referred to as the parent company. The key feature of this relationship is the parent company’s majority ownership, often exceeding 50%, granting it significant influence over the subsidiary’s management and strategic direction, including decisions made at the board level.
Despite this control, subsidiaries maintain their own legal identity, which provides several advantages to the parent company, such as reducing financial risk, offering tax benefits, and enhancing operational efficiency.
Corporations, especially large ones, may operate a network of subsidiaries across various regions and sectors, enabling them to expand their market reach, diversify their business activities, and effectively manage risks.
Example:
If Company A can affirmatively answer any of the following questions, then Company A will be considered a subsidiary of Company B:
- Does Company B have the authority to appoint or dismiss most of the directors of Company A?
- Does Company B possess the right to cast more than half of the votes that could be cast by Company A’s shareholders?
- Does Company B own over half of the shares in Company A?
Moreover, if Company B owns 100% of Company A’s shares, then Company A is a wholly owned subsidiary of Company B. If the primary function of Company B is merely to hold shares in its subsidiaries, it is commonly referred to as a holding company. However, if Company B also engages in business operations beyond holding shares, it is generally termed as a parent company.
Indirectly Held Subsidiaries
A business entity can be part of a complex corporate structure where it is considered an indirectly held subsidiary. This situation arises when the business is owned by another entity, which in turn is a subsidiary of a larger, ultimate holding company.
Such a hierarchy allows for multiple layers of subsidiaries under the overarching control of one primary corporation. If an entity holds a minority share, meaning less than half of another company’s shares, it is not termed a subsidiary. Instead, these relationships are classified as affiliates, associates, or related entities.
These terms indicate a significant but not controlling investment by one company in another, reflecting a partnership or collaborative relationship rather than one based on direct control.
How Does a Subsidiary Company Work?
A subsidiary company plays a critical role within the structure of a larger corporate entity, often serving as a strategic component of a parent or holding company‘s overall business strategy. Unlike the parent company, which primarily holds assets and its stock, the subsidiary is deeply involved in operational activities.
Operational Independence and Activities
The primary function of a subsidiary is to manage its operations, similar to any standalone company. This operational scope includes entering into contracts, owning assets, and borrowing money.
The subsidiary has the autonomy to conduct business transactions, manage its finances, and pursue objectives that align with the strategic goals of the parent company. This autonomy allows subsidiaries to adapt to market changes, innovate, and respond to customer needs with the agility of a smaller enterprise, while still leveraging the resources and stability of the larger corporate structure.
Strategic Role and Alignment
Subsidiaries often serve specific strategic purposes for the parent company, such as entering new markets, diversifying company interests across different industries, or managing parts of the business that require specialised knowledge or operations.
By operating through subsidiaries, a parent company can spread its risk across different entities and ensure that financial or operational challenges within one subsidiary do not directly impact the broader organisation.
Legal and Financial Distinction
Legally, subsidiaries are separate entities from their parent companies. This separation is crucial for liability purposes, as it typically insulates the parent company from legal challenges or debts incurred by the subsidiary.
Financially, while a subsidiary manages its own budget, investments, and revenue generation, its financial performance directly contributes to the parent company’s overall financial health. The parent company may also provide financial support to its subsidiaries in the form of capital injections or guarantees for loans.
Governance and Control
While subsidiaries operate independently, their strategic direction and major decisions are often influenced or directly controlled by the parent company. This control is usually exercised through the parent company’s ownership of the subsidiary’s voting stock, allowing it to appoint board members and influence or dictate major business decisions.
Despite this control, subsidiaries often retain a level of operational autonomy, enabling them to understand their specific market conditions effectively.
Integration within the Corporate Structure
Subsidiaries are integrated into the parent company‘s corporate structure in a way that maximises synergies and strategic alignment. This integration can involve shared services, such as human resources or IT support, to leverage economies of scale, or strategic collaborations that allow the parent company and its subsidiaries to capitalise on market opportunities more effectively.
Benefits of Establishing a Subsidiary Company
Maximises Tax Advantages
Setting up subsidiaries in various locations allows a parent company to benefit from more favourable tax laws and structures that might exist outside the parent company‘s home country. This arrangement can lead to significant tax savings, including the ability to consolidate profits and losses across the group to minimise the overall tax burden.
Enhances Liability Protection
By operating through subsidiaries, a parent company can shield itself from legal liabilities. Since subsidiaries are distinct legal entities, any financial troubles, lawsuits, or losses they incur typically do not impact the parent company directly, thus offering a layer of protection against risks.
Increases Operational Efficiency
Subsidiaries situated in local markets can operate more effectively by tailoring their operations and strategies to the specific needs and conditions of those markets. This localised focus enhances responsiveness and competitiveness, which might be cumbersome for a parent company managing from afar.
Expands Market Presence
Subsidiaries serve as a strategic vehicle for parent companies looking to enter new geographical regions. This approach allows for market expansion with reduced risk and capital investment compared to starting from scratch or acquiring existing businesses.
Promotes Diversification
Through subsidiaries, a parent company can venture into new industry sectors, diversifying its business portfolio. This diversification can mitigate risks and provide access to new technologies, intellectual property, and specialised knowledge, broadening the company‘s capabilities and market opportunities.
Offers Strategic Flexibility
Subsidiaries offer a flexible framework for experimenting with new products, business models, or market strategies without exposing the entire parent company to potential failures or risks. This flexibility enables the parent company to adjust its strategy by scaling, divesting, or closing subsidiaries based on performance and strategic fit.
Facilitates Capital Acquisition
Creating a subsidiary can isolate specific assets or business activities, particularly those with higher risk profiles, making it easier for those entities to attract investment or raise capital independently from the parent company. This structure can be advantageous for funding growth initiatives or innovative projects within the subsidiary.
Difference Between a Subsidiary and a Branch
The distinction between a branch and a subsidiary lies primarily in their legal status and operational scope, especially for international businesses expanding into new territories, such as Australia. A branch operates as an extension of its foreign parent company without constituting a separate legal identity.
This means that when a foreign corporation seeks to establish a presence in Australia through a branch, it must register as a foreign entity under Australian regulations.
Deciding whether to form a subsidiary or establish a branch office involves evaluating various factors. These factors include the initial setup processes, the allocation of liabilities, and the frequency of tax filing obligations.
Each option presents different implications for operational autonomy, legal responsibility, and financial reporting, which are crucial in strategic business planning for market expansion.
Why Register a Subsidiary Company in Australia
Legal and Financial Independence
A subsidiary offers the benefit of operating as an independent legal entity. This distinction limits the parent company‘s liability concerning the subsidiary‘s financial challenges, contrasting with a branch office where the parent company bears full financial responsibility.
Tax Benefits
Tax is a significant factor when choosing to establish a subsidiary. Unlike a branch office, which is taxed only on income earned in Australia, a subsidiary faces taxation on its global income. However, this comes with the potential to leverage tax incentives and measures provided by Australian legislation, thanks to its status as an Australian based entity. This aspect makes a subsidiary an attractive option for managing global tax liabilities more effectively.
Steps for Establishing a Subsidiary in Australia
Initial Registration Process
The first step to open a subsidiary in Australia starts with the company‘s registration at the Australian Securities and Investments Commission (ASIC). This foundational step ensures that the company is legally recognised and able to commence operations.
Naming and Identification
Choosing a trading name for the Australian subsidiary is critical, as it marks the entity‘s identity within the market. Following this, obtaining an Australian Business Number (ABN) and a Tax File Number (TFN) is essential, serving as the subsidiary’s identification for trading and taxation purposes.
Tax Registration
Registering for tax obligations is a key step, involving the Goods and Services Tax (GST) and the Pay As You Go (PAYG) tax system. This ensures the subsidiary complies with Australia‘s tax laws from the outset.
Local Representation and Office Location
Appointing a local representative is required to manage the subsidiary‘s operations within Australia, providing a link between the foreign parent company and the Australian business environment. Additionally, securing an official business address through suitable office space is necessary for establishing a physical presence.
Financial Setup
Opening a corporate bank account and depositing the required capital, which varies based on the chosen company type, finalises the financial preparations for the subsidiary, setting the stage for its operational activities.
This article is general information only and does not provide advice to address your personal circumstances. To make an informed decision you should contact an appropriately qualified professional.