Parent Companies and Subsidiaries: How They Work

Published: 15 October 2026 11:15 am Author: Oliver Stanley

Most growing businesses reach a point where one company stops being enough. A new product line needs ring-fencing, an investor wants a clean vehicle, a property needs holding separately, or an acquisition brings another company into the fold. The usual answer is a group: a parent company at the top, and one or more subsidiaries underneath.

The concept is simple enough. The detail, from what legally makes a company a subsidiary, to who goes on whose PSC register, to which companies need audited accounts, is where people get caught out. This guide covers how parent companies and subsidiaries work under UK law, and what a group structure actually means for the company secretarial side of things.

What Is a Subsidiary?

A subsidiary is a company that is controlled by another company, known as its parent or holding company. Under section 1159 of the Companies Act 2006, a company is a subsidiary of another company if that other company:

holds a majority of the voting rights in it;
is a member of it and has the right to appoint or remove a majority of its board of directors; or
is a member of it and controls, alone and under an agreement with other members, a majority of its voting rights.

The test is about control, not just ownership. In most groups the two line up neatly, with the parent simply owning more than 50% of the voting shares, but a company can also be a subsidiary through board appointment rights or a voting agreement, even where the parent’s economic stake is smaller.

The definition also works down the chain. If Company A controls Company B, and Company B controls Company C, then Company C is a subsidiary of both B and A. That’s why a large group can have subsidiaries several layers deep that are still, legally, subsidiaries of the ultimate parent.

Parent Company vs Holding Company: Is There a Difference?

In everyday use, the two terms are interchangeable. The Companies Act 2006 uses “holding company” in section 1159 to describe the company at the top of a subsidiary relationship.

In practice, “holding company” is often used more narrowly to describe a parent whose main job is to own shares in other companies, rather than trading itself. A parent company might run its own operations and also own subsidiaries. A pure holding company typically owns the subsidiaries, holds group assets, and does little else.

What Is a Wholly Owned Subsidiary?

A wholly owned subsidiary is one where the parent (or the parent’s other wholly owned subsidiaries, or nominees acting for them) owns all of the shares. There are no outside shareholders.

This is the most common structure for groups set up by a single business, because it keeps decision-making simple: the parent can pass shareholder resolutions alone, there are no minority shareholders to consult, and dividends flow straight up the chain.

A majority-owned subsidiary, by contrast, has outside shareholders alongside the parent. That’s common in joint ventures, management buy-ins, or where founders retain a stake in a business after selling control. The parent still controls it, but minority shareholders have rights that have to be respected, including on dividends, share issues, and certain resolutions.

Accounting Definitions: Parent and Subsidiary Undertakings

One area that trips people up is that UK company law has two overlapping definitions.

Section 1159 (above) is the general company law definition of a subsidiary. For accounts purposes, section 1162 uses a broader concept of “parent undertaking” and “subsidiary undertaking”. As well as the voting and board control tests, it captures situations where one undertaking has the right to exercise a dominant influence over another (through the articles or a control contract), or actually exercises dominant influence or control, or where the two are managed on a unified basis.

“Undertaking” is also wider than “company”, so it can include partnerships and unincorporated associations.

The practical upshot: an entity can be a subsidiary undertaking for group accounts purposes without being a subsidiary under section 1159. If you’re working out whether group accounts are needed, section 1162 is the one that matters.

Why Do Businesses Set Up Subsidiaries?

There’s no single reason, but these come up most often:

Ring-fencing risk. A subsidiary is a separate legal person. If a new venture fails, its debts generally stay with that company rather than flowing up to the parent, unless the parent has guaranteed them.
Separating activities. Different trades, brands, or regulated activities can sit in their own companies, each with its own board, contracts, and accounts.
Holding assets. Property, intellectual property, or investments are often held in a separate company from the trading business, keeping valuable assets away from day-to-day trading risk.
Investment and exit planning. A subsidiary can be sold, or can take outside investment, without disturbing the rest of the group.
Acquisitions. Buying a company’s shares, rather than its assets, brings it into the group as a new subsidiary.
Tax planning. Group structures can allow losses to be shared and profits to move between companies more efficiently (more on that below).

Subsidiary vs Branch: What’s the Difference?

A branch is not a separate company. It’s simply part of the parent company operating in another location, often another country. The parent is directly responsible for everything the branch does, its contracts are the parent’s contracts, and its liabilities are the parent’s liabilities.

A subsidiary is its own company, with its own registration, directors, and statutory obligations. That separation is the main reason businesses choose a subsidiary over a branch, but it comes with more compliance work: each subsidiary has its own filings, registers, and accounts to keep on top of.

For UK purposes, an overseas company that wants to operate here can either register a UK establishment (broadly, a branch) with Companies House, or incorporate a UK subsidiary. The subsidiary route creates a UK company with its own full set of obligations.

Is a Parent Company Liable for Its Subsidiary’s Debts?

Generally, no. A subsidiary is a separate legal entity, and limited liability means its creditors usually can’t pursue the parent just because it owns the shares.

There are important exceptions in practice:

Parent company guarantees. Lenders, landlords, and major suppliers frequently ask the parent to guarantee a subsidiary’s obligations. Once a guarantee is signed, the protection falls away for that liability.
Audit exemption guarantees. If a subsidiary claims the parent guarantee audit exemption (see below), the parent guarantees the subsidiary’s outstanding liabilities at the financial year end.
Direct involvement. If the parent itself acts in a way that creates a liability, for example by contracting directly or taking on duties, that liability is the parent’s own.

Directors of a Subsidiary: Whose Interests Come First?

This is one of the most misunderstood points in group structures. The directors of a subsidiary owe their duties to the subsidiary, not to the parent or the wider group.

In a wholly owned, solvent group, the interests usually align and this rarely causes friction. But it matters when a subsidiary is in financial difficulty, when it has minority shareholders, or when the parent wants it to do something that benefits the group at the subsidiary’s expense (such as giving a guarantee or making an intra-group loan on unfavourable terms). Board minutes should show that the subsidiary’s directors considered the decision from the subsidiary’s own perspective.

It’s also common for the same people to sit on the boards of several group companies. That’s fine, but each board meeting and each resolution is a decision of that specific company, and needs to be recorded in that company’s own records.

How Subsidiaries Appear on the PSC Register

Every UK company must keep a register of people with significant control (PSCs) and report it to Companies House. In a group, this is where the concept of a relevant legal entity (RLE) comes in.

An RLE is a legal entity that would count as a PSC if it were an individual, and that is itself subject to its own PSC disclosure requirements (for example, a UK company that keeps its own PSC register) or has voting shares admitted to trading on a specified regulated market.

The key rule, set out in the Companies House PSC guidance on the regime for legal entities, is that a company records only the first registrable RLE in its ownership chain. It doesn’t look all the way up to the ultimate individual owner.

Take a simple chain where Person 1 owns Company C, which owns 100% of Company B, which owns 100% of Company A, all UK companies:

Company A records Company B as its RLE.
Company B records Company C as its RLE.
Company C records Person 1 as an individual PSC.

There are two common exceptions worth knowing:

Direct and indirect holdings. If Person 1 also holds shares in Company A directly, they may need to be recorded as a PSC of Company A too, with their direct and indirect interests combined.
Non-RLE links in the chain. Where an entity in the chain isn’t an RLE (for example, an overseas company without shares traded on a specified market), you have to look through it to find the individual or RLE that holds a majority stake further up.

Changes to a subsidiary’s PSC or RLE details need to be reported to Companies House within 14 days of confirming them. A share transfer within a group, a restructuring, or a new holding company being inserted on top of an existing business will almost always trigger PSC changes in at least one company.

Accounts and Audit for Group Companies

Group Accounts

Under section 399 of the Companies Act 2006, a parent company must prepare group (consolidated) accounts as well as its own individual accounts, unless it’s exempt.

The most commonly used exemptions are:

Small groups. A parent subject to the small companies regime is exempt, provided the group doesn’t include certain types of undertaking (broadly, companies with securities traded on a UK regulated market, banks, and insurers).
Intermediate parents. A parent that is itself included in the consolidated accounts of a larger group may be exempt from preparing its own group accounts, subject to conditions.

Group accounts can still be prepared voluntarily even where an exemption applies.

Every Subsidiary Still Files Its Own Accounts

Being part of a group doesn’t remove a subsidiary’s own filing obligations. Each UK subsidiary must still prepare and file its own annual accounts at Companies House, and its own confirmation statement, on its own deadlines. Dormant subsidiaries file dormant accounts, but they still file.

The Parent Guarantee Audit Exemption

A UK subsidiary may be able to skip its own statutory audit, even if it’s not small, under section 479A. Broadly, the conditions are:

the parent is established under the law of a part of the UK;
all members of the subsidiary agree to the exemption for that year;
the parent gives a statutory guarantee of the subsidiary’s outstanding liabilities at the year end;
the subsidiary is included in the parent’s audited consolidated accounts, with the exemption disclosed in the notes; and
the subsidiary’s directors file the required documents at Companies House, including the guarantee and a copy of the group accounts, by the time the subsidiary’s own accounts are filed.

It’s a useful exemption, but the guarantee is a real commitment, so it shouldn’t be treated as a box-ticking exercise.

Tax Points to Be Aware Of

Group tax planning deserves specialist advice, but a few headline points shape how most groups are structured:

Group relief. For corporation tax, companies form a group relief group where one is a 75% subsidiary of the other, or both are 75% subsidiaries of a third company. That allows trading losses in one company to be surrendered against profits in another. The 75% test looks at ordinary share capital and entitlement to profits and assets, and indirect holdings are calculated by multiplying percentages down the chain. HMRC’s Company Taxation Manual sets out the detail.
Dividends up the chain. Dividends paid by a UK subsidiary to its UK parent are generally exempt from corporation tax in the parent’s hands, which is why profits can usually move up a group without a tax charge at each level.
Thresholds that matter. The 50% control test makes a company a subsidiary for company law purposes, but the tax thresholds are different. A 60% subsidiary is a subsidiary under the Companies Act, but not in a group relief group.

Tax rules change regularly. Check the current position with HMRC guidance or a tax adviser before relying on any of the above for a specific structure.

Common Admin Pitfalls in Group Structures

The legal concepts are rarely the problem. The day-to-day admin is. These are the issues that come up most often:

PSC registers that don’t match the structure. A share transfer or restructure happens, the shareholder register is updated, but the subsidiary’s RLE entry isn’t.
Group structure charts that are out of date. The chart in the data room or the board pack was accurate two acquisitions ago.
Missed filings for small or dormant subsidiaries. The trading companies get attention, the dormant ones get forgotten, and late filing penalties follow.
Board decisions recorded in the wrong company. One meeting covers several group companies, but minutes and resolutions aren’t produced for each one.
Identity verification gaps. With Companies House identity verification now required for directors and PSCs, directors who sit on several subsidiary boards need their verification reflected across every company they’re appointed to.

Each subsidiary is a full company in its own right, so a group of ten entities means ten sets of registers, ten confirmation statements, and ten sets of accounts. The work scales with the structure.

FAQs About Subsidiaries

What makes a company a subsidiary in the UK?

Under section 1159 of the Companies Act 2006, a company is a subsidiary if another company holds a majority of its voting rights, is a member and can appoint or remove a majority of its board, or is a member and controls a majority of the voting rights under an agreement with other members.

Can a subsidiary own shares in its parent company?

Generally, no. The Companies Act 2006 prohibits a company from being a member of its own holding company, and any allotment or transfer of the parent’s shares to its subsidiary is void, subject to limited exceptions (for example, where the subsidiary holds the shares only as a personal representative or trustee with no beneficial interest).

Does a subsidiary need its own directors?

Yes. Every subsidiary is a separate company and must have at least one director who is a natural person (a private company) or two directors (a public company). The same individuals can sit on the boards of several group companies.

Does a subsidiary need its own company registration number?

Yes. Each UK subsidiary is registered at Companies House in its own right, with its own company registration number, registered office, and filing history.

Does a subsidiary have to file a confirmation statement?

Yes. Each subsidiary files its own confirmation statement at least once every 12 months, confirming its details, shareholders, PSCs or RLEs, and SIC code. Being part of a group doesn’t change this. Our guide on how to file a confirmation statement covers the process.

Can a subsidiary have more than one parent?

A subsidiary has one immediate parent for each control route, but because the definition works down the chain, it can be a subsidiary of several companies at once (its immediate parent, its parent’s parent, and so on). In a joint venture where two companies each hold 50%, neither has majority control under the voting test, so the JV company may not be a subsidiary of either, depending on board rights and any shareholder agreement.

What’s the difference between a subsidiary and an associate?

A subsidiary is controlled by its parent. An associate is a company in which another company has significant influence, but not control, typically through a holding of around 20% to 50% of the voting rights. Associates are accounted for differently and aren’t part of the group for company law purposes.

Can an LLP be a subsidiary?

An LLP can be a subsidiary undertaking for accounts purposes under section 1162, and a company can be a member of an LLP. For PSC purposes, a UK LLP that keeps its own PSC register can also be an RLE.

How Kudocs Helps Manage Group Structures

For firms and in-house teams managing several group companies, keeping each entity’s records accurate, and keeping the overall picture straight, is the hard part.

In Kudocs, the groups feature lets you add entities, designate parent and subsidiary relationships, record the shareholding percentage between them, and automatically generate an exportable group structure chart. Entities outside Kudocs, including non-UK companies, can be added to the chart too, so the full structure sits in one place.

As well as the chart, you can also export reports and registers, just for the group, and assign user permission just for the group (which is easier than adding user permission on a company-by-company basis).

At entity level, each subsidiary has its own statutory registers, filings, and documents. Adding an RLE updates the company’s registers and files the change with Companies House electronically, and share transfers, dividends, resolutions, and confirmation statements are all handled from the same dashboard.

The Takeaway

A subsidiary is a company controlled by another company, usually through a majority of the voting rights. That simple relationship brings real benefits: ring-fenced risk, cleaner asset holding, flexibility for investment and exits, and tax efficiency within a group. But every subsidiary is still a full company, with its own directors, duties, registers, PSC or RLE entries, accounts, and Companies House filings.

The groups that run smoothly are the ones where the structure chart, the registers, and the filings all tell the same story. If you’re managing company secretarial work across multiple group entities, see how Kudocs helps advisers manage entities at scale, or book a 15-minute demo to see it against your own client list.