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A parent company is sometimes referred to as an umbrella – an odd analogy for anyone who’s unfamiliar with parent companies. However, it’s actually a pretty reasonable way to describe the function of a parent company.
A parent company holds the majority shares of another company under its charge (known as a subsidiary). A parent company can hold multiple subsidiaries under its name, which is why it’s often referred to as an umbrella, providing support and management to its subsidiaries.
For a parent company to operate effectively, it must be legally set up and structured in a way that accurately reflects its role and responsibilities. However, the process of establishing a parent company with subsidiaries can be complex and confusing.
Don’t worry though, we’ve got you covered. Keep reading to learn more.
What Is A Parent Company And A Subsidiary?
So, how exactly do parent companies and their subsidiaries work?
Essentially, a parent company owns a majority of the stock in its subsidiary company giving them controlling interests. To achieve this level of control, parent companies typically need to own more than 50% of the subsidiary’s voting stock. Once they acquire this level of ownership, the other company becomes a subsidiary of the parent company.
With their controlling power, parent companies can influence decisions affecting the subsidiary and play a role in managing its operations. The exact role a parent company plays in the management of a subsidiary depends on the agreement and relationship between the companies. Some parent companies choose to be heavily involved in the day-to-day management of their subsidiaries, while others might limit their involvement to making major strategic decisions.
Is There A Difference Between A Parent Company And A Holding Company?
Yes, there is a difference between a parent company and a holding company. While they are related, a holding company is a specific type of parent company. The key distinction lies in their involvement with subsidiaries.
Holding companies are generally less involved in the everyday operations of their subsidiaries compared to parent companies. They primarily focus on owning and managing investments. In contrast, parent companies often play a more active role in managing and overseeing their subsidiaries. Additionally, parent companies usually have their own business operations, whereas holding companies typically exist solely to manage their subsidiaries.
How Do I Set Up A Parent Company With Subsidiaries In Australia?
In Australia, all companies (no matter their type) are registered with the Australian Securities and Investments Commission (ASIC). Company registration can be completed online however, it can get a little complex.
To set up a parent company, there’s no specific box you can tick on your registration form with ASIC to automatically become a parent company. Rather, your company’s legal structure will play a role in determining its suitability to be a parent company. Setting up the correct legal structure with ASIC can be pretty overwhelming if you’re not familiar with navigating ASIC, so it’s important to have a legal expert help you out with this.
Once your company is set up with ASIC, the next step is making sure all the right legal documents are in place. Governing documents play a detrimental role in ensuring your company is suitable to be a parent company. A few legal documents to consider getting drafted include:
If you’re looking to set up a parent company with subsidiaries then we don’t recommend doing this process alone. A legal expert can guide you through your company’s registration process and help you draft the necessary legal documents. That way, your company will be ready and protected when it’s time to invest in subsidiaries.
We’ve also written about setting up a subsidiary company in our article, How To Set Up A Subsidiary Company.
Are Parent Companies Liable For Subsidiaries?
As a general rule, parent companies and subsidiaries are considered to be separate legal entities. Therefore, the subsidiary alone is responsible for their own liabilities, such as any debts they may incur.
However, this is a general principle – exceptions can occur. In certain circumstances, a parent company can be considered liable for its subsidiaries. For instance, if a parent company is directly involved in the decision-making process or if the directors are aware of certain issues and fail to act on them, a court may rule that the parent company is liable for the shortcomings of its subsidiary.
There are certain defenses though, such as safe harbour provisions which can protect your parent company if something goes wrong with one of your subsidiaries. Lability is highly impacted by specific circumstances, so it’s difficult to make general statements.
It’s best to talk with a legal expert about your options and how to best manage the liability risks when functioning as a parent company with subsidiaries.
Can A Subsidiary Leave A Parent Company?
Yes, a subsidiary can leave a parent company. Under certain circumstances, such as a sale of the company, spin off, buyout, merger or other similar transactions, a subsidiary can separate from its parent company.
However, a subsidiary usually cannot leave a parent company on its own accord. The way parent companies and subsidiaries are structured means that a parent company will need to approve the separation of the subsidiary before it can actually happen.
As a parent company, it’s a good idea to have thought through all the possible scenarios and have this reflected in your company’s governing documents and contracts. That way, no matter what situation arises in business, you’ll always be prepared for it.
Next Steps
Setting up a parent company with subsidiaries requires a considerable amount of legal preparations. Having the right kind of legal experts assist you in this process can make sure everything gets done with ease. To summarise what we’ve discussed:
- A parent company holds the majority shares of its subsidiary, often more than 50%, allowing it to control and influence decisions
- The primary difference between a parent company and a holding company is the level of involvement in the subsidiary’s daily operations; parent companies are more active
- In Australia, setting up a parent company requires registration with ASIC and drafting essential legal documents like a company constitution and shareholders agreement
- Legal experts are recommended for navigating the complex registration and setup process for a parent company with subsidiaries
- Parent companies are generally separate legal entities from their subsidiaries and are not liable for their debts, but exceptions can apply
- Subsidiaries can leave a parent company through sales, spin-offs, or mergers, but usually require the parent company’s approval
- Governing documents should be prepared to handle various scenarios to ensure the parent company is always protected and compliant
If you would like a consultation on setting up a parent company with subsidiaries, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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