Holding companies and subsidiaries

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Broadly speaking, a “group” is a family of companies linked by their shareholdings in each other. A company which is controlled by another is known as a “subsidiary” company while a company which controls another is termed a “holding” company. Groups are usually formed in order to take advantage of the increased level of limited liability, to achieve greater flexibility of business administration or due to tax reasons and circumstantial necessities.

Groups are a common characteristic of corporate structures as subsidiaries are often used to hold assets or to undertake various business activities. It is important to know that each company in a group remains a legal entity in its own right.

What are the key features of holdings and subsidiaries?

A “subsidiary” of another company (its “holding company”) is characterised by the following key features:

• It holds more than 50% of the subsidiary voting rights
• It is a member and controls more than 50% of the subsidiary’s voting rights on its own
• It is a member and has the right to appoint or remove a majority of the subsidiary’s board of directors

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Therefore, it is possible to form chains of companies. A company (B Ltd), for example, may have a subsidiary (C Ltd) and simultaneously may be the subsidiary of another company (A Ltd). In this case, C Ltd will also be the subsidiary of A Ltd and is known as the “ultimate holding company”.

 

 

When is a subsidiary wholly owned?

A “wholly-owned subsidiary” of another company means that the shareholders of the holding company are the same as those of the subsidiaries.

• As illustrate2d, A Ltd is the holding company of B Ltd and C Ltd

B Ltd is the holding company of C Ltd and a wholly-owned subsidiary of A Ltd2

C Ltd is a subsidiary of B Ltd and a wholly-owned subsidiary of A Ltd

 

 

 

What is the liability of the parent company?

One of the consequences of a parent-subsidiary relationship is the limited liability arising from the separate legal personality of each company.This separation can make it difficult to find a parent company responsible for the liability of its subsidiaries. Due to that, companies may wish to divide up their trading activities in an effective way so that each company is responsible only for the business and trade it carries out.

What should I know regarding group accounts?

A group can report financial information as a single entity although it is not recognised as a separate legal person. Each individual undertaking within a group is required to maintain accounting records and to produce individual financial statements.

Group accounts also called “consolidated accounts” consist of the financial statements of the individual undertakings that comprise the group. They are added together and number of consolidation adjustments are then made.

Group accounts must be prepared by any company which is a parent undertaking at the end of the financial year. These are in addition to the parent’s individual accounts. Except where there are good reasons for not doing so, the directors of a parent company must ensure that the individual accounts of the parent and subsidiaries are all prepared using the same financial reporting framework.
Group accounts are subject to the same audit requirements as individual accounts and must be filed at Companies House in the same way as individual accounts.

Are small companies exempt from filing group accounts?

A parent company is exempt from the requirement to prepare group accounts for a financial year only if the group qualifies as a small group. A company will be excluded from qualifying as small if during the financial year it was a public limited company or an authorised insurance company.

A group can qualify as small if any two of the size limit conditions below are met:

• The maximum aggregated turnover is £6.5m net or £7.8m gross
• The maximum aggregated balance sheet total is £3.26m net or £3.9m gross
• The maximum aggregated average number of employees for the year is 50

What is the content of the group accounts?

Companies Act group accounts comprise a consolidated balance sheet, profit and loss account that give a true and fair view of the state of affairs. In general, the financial statements for all subsidiary undertakings included in the consolidation should be prepared to the same financial year as that of the parent. Thus, the group accounts usually take its figures from the financial statements of the subsidiaries for the relevant year.

If you have any questions or queries related to holding companies and subsidiaries or company formations in general, we are available for a live chat or you can leave a message on our Support & Contact web page and we will get back to you.