A subsidiary is an organisation that has its own legal identity but is owned by either one or more parent organisations.
The main reasons for establishing a subsidiary are:
- Allows Charities to undertake non-charitable trading
- Transfer of risk to the subsidiary so as to reduce the impact on the parent organisation
- Transparency and identity
- Access to new markets
- Tax advantages e.g. paying profits under gift aid to the parent charity
Before deciding to establish a subsidiary it is important to seek appropriate professional advice.
There are two types of structures for setting up a subsidiary:-
Here organisation A wholly owns the new organisation and profits will be distributed according to the Memo & Arts. For example, if a charity wishes to buy a property it could create a subsidiary organisation to purchase the property who would then lease it back to the charity. This has the advantage of removing the risks of owning a building from the charity. In this scenario there is the possibility of the profits from the subsidiary being gift aided to the charity.
Here two or more organisations jointly own the subsidiary. The level of control and distribution of any finanical rewards will depend on the legal agreement that defines the rights of each organisation. This type of structure could be used where two organisations wish to collaborate to deliver a particular service. This helps to reduce the risks to each organisation but at the same time has the potential to increase the financial return.
- A subsidiary can take any legal structure and is not restricted by the parent organisation’s legal structure
- A parent organisation can have any number of subsidiaries