Setting up a subsidiary: ownership, funding and group responsibilities

Choose a separate company for a reason

A subsidiary is distinct from its parent. It enters contracts and holds assets in its own name. A branch is part of the same legal entity, even if it operates at a different address or uses a separate trading name. That difference affects liability, accounts, customer documents and the way investment or a future disposal can work.

A separate entity may suit a new market, joint venture, distinct business risk or acquisition. It also costs money to maintain and can require repeated account checks and company filings. A UK establishment of an overseas company has a different registration regime from a newly incorporated UK subsidiary. Do not select an ordinary formation package until you have identified which arrangement you actually need.

Set the parent’s shareholding correctly

Record the exact legal name and registration details of the corporate subscriber. Decide the number, nominal value and rights of the subsidiary’s shares. A wholly owned subsidiary can be simple; a joint venture needs careful treatment of minority rights, funding obligations and deadlock. Control depends on more than a casual percentage description and can differ for company law, accounting and tax.

Confirm the parent has authority to make the investment and that its own constitution, lenders or shareholder agreement do not restrict it. Keep the subsidiary’s register of members and evidence of payment for the shares. A share certificate is useful evidence, but it is not a substitute for correct statutory ownership records.

• Use the parent’s legal identity, not a group trading name.
• Check board or shareholder approval needed for the investment.
• Agree share rights before admitting outside investors.
• Record paid and unpaid share capital accurately.
• Have ownership and control tests reviewed for the intended arrangement.

Work through the control chain

Companies House PSC reporting requires analysis of control and, in corporate chains, whether a relevant legal entity is registrable. A parent name on the register of members does not automatically settle the PSC filing. For overseas ownership or multiple layers, work through the statutory conditions and identify the required reportable people or entities.

Identity-verification requirements for directors and PSCs are role-specific and must be met when applicable. An agent may request additional corporate documents and beneficial-owner evidence under its anti-money-laundering procedures. Prepare an ownership diagram showing percentages and voting or appointment rights; this also helps the bank and accountant understand the structure.

1. 1

   List every entity and individual in the ownership chain.

2. 2

   Mark share, vote and director-appointment rights separately.

3. 3

   Check which people or legal entities meet reportable-control conditions.

4. 4

   Collect verification evidence and corporate documents.

5. 5

   Review the final filings with an adviser if the chain is complex.

Appoint directors who can act for this company

A subsidiary needs directors who understand its business and duties. Parent instructions do not automatically justify a decision that breaches a subsidiary director’s obligations. Shared directors should consider conflicts, record their decision-making and follow the articles’ authorisation provisions. A board minute should explain why the transaction is appropriate for the subsidiary, not merely convenient for the group.

Decide delegated limits for contracts, banking, staff recruitment and expenditure. If an employee signs for the wrong entity, the resulting contract may not reflect the intended risk allocation. Use legal names consistently in purchase orders, invoices, websites and employment documents.

Choose equity, loans and services deliberately

Equity investment provides share capital and may change rights if further shares are issued. A parent loan creates a repayment obligation that needs terms, interest treatment where relevant and reconciliation. Neither should be left as an unexplained bank transfer. If funding is short-term, assess how the subsidiary will repay without assuming the parent can always cover a shortfall.

Shared premises, staff, software and intellectual property need arrangements reflecting actual use. Intercompany charges may have VAT and other tax consequences. Keep invoices and allocation methods consistent, and avoid retroactive profit-shifting entries unsupported by services. Your accountant should see both sides of each balance.

Worth knowing: A subsidiary’s cash is not a group petty-cash account. Every transfer needs an identifiable legal and accounting basis.

Move business into the subsidiary properly

If an existing trade is moving from the parent, identify assets, customer contracts, debts, licences and employees. Some contracts can be assigned only with consent; transferring obligations may require novation. Regulated permissions may not follow the business automatically. Insurance must cover the correct entity and activity from the effective date.

Employee transfers can engage TUPE and consultation obligations, depending on the transaction. Intellectual property, leases and stock transfers require documentation and tax assessment. Do not announce that all customers now belong to a new company without reviewing what their contracts allow. Keep a cutover plan for billing, collections and customer communication.

Worked scenario: a new product division

Illustrative scenario: a UK manufacturer plans a subscription software service and considers a wholly owned subsidiary. It wants separate customer contracts and the option to bring in a software investor later. The parent subscribes for shares, approves a loan facility and documents a licence for any parent-owned technology used by the subsidiary.

Before launch, the group identifies which company employs developers, carries product liability insurance and invoices customers. It does not assume the new subsidiary inherits the parent’s contracts or VAT registration. Its accountant assesses tax registrations, associated-company effects and reporting requirements. The founders compare this work with keeping the product as an internal division.

Prepare a subsidiary launch pack

A parent company planning a new retail subsidiary should identify exactly what the subsidiary will do and own. It decides whether the new entity holds customer contracts, inventory, employees, premises and licences, or merely performs a supporting role. Share ownership alone does not transfer those assets or obligations. The board reviews why a separate company is needed and whether parent-company approvals, lender consent or shareholder reserved matters apply. It checks the formation service supports a corporate shareholder and the proposed ownership chain rather than assuming a basic one-person package is suitable.

The incorporation information must reflect the actual directors, registered office, share allocation and relevant control position. Corporate ownership does not remove identity and control analysis. The parent prepares the evidence a formation provider and bank may request, including its own registration details, ownership structure and authorised decision-makers. The subsidiaries’ directors understand they act for that company and cannot disregard its interests merely because the parent gives instructions. Where the same directors serve several entities, conflicts and approval processes are documented. Personal and company verification references are kept distinct.

The parent then sets funding terms. If it subscribes for shares, records must match the allotted capital and payment. If it lends money, the agreement specifies amount, repayment, interest and any security. A shared-service arrangement should identify what the parent provides, how charges are determined and how tax and VAT are treated. Employees and intellectual property need deliberate allocation; payroll by one entity does not alone answer who employs the staff or owns the work. The group accountant assesses associated-company, group-relief and reporting implications without assuming every benefit applies automatically.

Before trading, the subsidiary obtains the account and operational services appropriate to its own activities. Contracts identify its legal name, and customers are not led to believe the parent is liable unless that is the agreed legal position. The parent reviews any guarantees it offers and whether they undermine expected risk separation. Both companies reconcile balances monthly and keep their own evidence for intercompany transactions. A launch checklist assigns responsibility for accounts, tax registrations, statutory records and official post. Future closure or sale is easier where the subsidiary has a clear record from its first day.

Maintain the subsidiary as a real entity

Keep separate accounting records and reconcile intercompany balances regularly. Each company’s filing calendar must identify accounts, confirmation statements, tax registrations and returns, even when directors are shared. Consider whether aligned accounting dates and group reporting would help, but check exemptions and requirements rather than assuming consolidation is unnecessary.

If the subsidiary is inactive, review its transactions before claiming dormancy. If it runs out of cash, its directors need to consider creditor interests and professional advice. Parent support should be documented and realistic; a vague promise of funding is not evidence that debts can be paid.

Common questions

Official sources & further reading

This guide draws on the official guidance below. Rules, fees and individual circumstances can change; check the relevant source before acting.

• Companies Act 2006: Holding and subsidiary companies
• GOV.UK: Overseas companies
• GOV.UK: Business transfers and TUPE

General UK information, primarily for private companies limited by shares. This is not personalised legal, tax or financial advice. An accountant or solicitor can help apply the rules to your situation.