Should you set up a subsidiary company?

Should you set up a subsidiary company?

The answer to this question is, it depends; on what you’re company is, what your plans for the venture are and how quickly you think the idea will get off the ground. 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 based on your new idea can be a sound decision. It makes it a lot easier to keep the new project at arms 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 by them and forced to carry them. The advantages of starting a business as a company are that there is more credibility associated with having your own company, and of course your liability is limited to the amount you agree to invest in the company when buying shares. It is far easier to raise large sums of money for the business, or sell part of the business if it is a company.

There are tax advantages for those earning a high salary, by keeping money in the business or making pension payments. 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 the business; if you are looking to grow something to sell, a separate company can be the right way to go.

The downsides

The main downsides to setting up a new company are cost and complexity. The cost element is straight-forward, an extra company means extra running costs, extra accountants fees, extra business admin costs and far more complexity when it comes to both day to day running and annual returns. For companies earning more than £5.6 million annually, an independent audit is compulsory. You will also have to pay employer’s as well as employee’s national insurance contributions on salaries. Additionally, you must factor in that your businesses are legal separate entities.

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.

There are as both advantages and disadvantages to setting up a company, as you would have discovered with your first business, however the advantages tend to increase as your business grows.

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 service to your existing business, and you aren’t planning to sell or fundraise for it, creating a sub-brand within your company may be the most cost-effective route forward.

For most entrepreneurs the key is finding the balance. 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.

For more information on companies, you can contact Companies House.

This piece was updated on April 6, 2018, by Marcus Taylor, CEO of Venture Harbour. 

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