The answer is that it depends; on your present firm, your ambitions for your new subsidiary company, and how soon you believe the project will get off the ground.
In summary, there is no clear right or wrong strategy, only a series of trade-offs to consider while determining the optimal path for your company.
However, there are several criteria that might help you decide which strategy is best for you.
Setting up a new company
Establishing a new firm based on your fresh concept might be a wise move. It makes it much easier to maintain the new project separate from your present one. It also isolates the obligations so that if your new company runs into financial difficulties, your current firm will not be damaged and forced to bear the consequences. The benefits of launching a firm as a corporation rather than a subsidiary branch are that having your own corporation gives you more legitimacy. It is significantly easier to raise big quantities of money for the firm or sell a portion of the business if it is its own corporation.
Depending on the size and form of your business, you may potentially be eligible for entrepreneurs’ relief if you sell it. This brings us back to the subject of what your endgame is in this business. If you want to build something to sell, forming a separate company may be the best option.
Downsides of setting up a new company
The major disadvantages of starting a new business are the expense and complexity. The cost factor is straightforward: an additional company implies more running costs, additional accountant fees, additional business admin costs, and significantly more complexity in terms of both day-to-day operations and yearly returns.
Tax and legal implications
Although you are the link between the two, there are currently hurdles in place that might make cash flow and asset transfers between the firms difficult. Intellectual property is an excellent example. If IP moved between firms is assessed to have monetary worth, a tax bill is incurred. It isn’t always an issue, but if your old firm owns the intellectual property for your new concept, consider the legal and tax ramifications while determining the timing for forming your new company.
What is a subsidiary company?
A subsidiary firm is one that is owned or managed by the parent or holding business.
In the United Kingdom, the parent firm owns the majority of the subsidiary company. It owns more than half of the subsidiary’s equity and controls the majority of voting rights. Subsidiaries can be created when one firm buys another or when the parent or holding company creates one. A subsidiary firm is a separate legal entity from its parent for tax, regulatory, and liability purposes. As a result, the subsidiary firm bears the majority of the risk of being sued and operates as a separate legal entity from the parent business.
Benefits of a subsidiary company
To begin with, it restricts the parent company’s exposure, since it will not be liable for incurred expenditures such as legal bills or financial compensation. While the parent company retains primary control of the subsidiary firm, it is not accountable for its losses, providing a safety net for the parent company and allowing losses and other difficulties to be minimised and managed effectively.
New company versus subsidiary
Determining your final goal is critical in determining whether or not establishing a subsidiary is the best option for you and your organisation.
The advantages of keeping your new concept within the present firm include a low-risk test bed to evaluate if your idea has legs.
Before spending time and effort into establishing a new firm, you may work on a prototype to evaluate whether there is an MVP in your idea. It all relies on your project’s goal, whether it is a long-term complementary product or an extra service to your present firm, and if you want to sell or obtain funding for it. Creating a sub-brand within your organisation may be the most cost-effective option.
Starting a subsidiary company
The private limited company (ltd) is the most frequent kind of business establishing a UK subsidiary, and setting up a ltd company entails going through the usual UK company registration process and applying to Companies House for incorporation.
Incorporation is the process through which a new or existing business becomes incorporated as a corporation. For a charge, a company formation agency, solicitor, accountant, or chartered secretary can handle the procedure. A limited company can also be registered online using the Companies House web incorporation service.
There will be a significant quantity of documents necessary regarding shareholders and the director, which will be scrutinised by Companies House before a decision on the formation of the subsidiary is made.
The corporation must have at least one named director and a registered office location in the nation of the subsidiary. This implies that if you are establishing a subsidiary in the UK but the parent or holding company is registered elsewhere, the subsidiary will require a legitimate office location in the UK.
Annual accounts must be prepared and filed by all UK limited firms. If the company’s turnover surpasses £10.2 million, its balance sheet exceeds £5.1 million, or it has more than 50 workers on average, it must additionally undergo an annual independent audit.
Directors are directly liable for filing the company’s annual return and yearly accounts to the Registrar of Companies. In the event of noncompliance, penalties are imposed.
Companies House will forward the data of a newly registered business to HM Revenue & Customs (HMRC). Within three months of incorporation, the firm must also contact its local HMRC office.