Introduction
Let’s say you’ve registered your business and it’s doing really well. Now you’re looking into potential growth opportunities. You could be interested in expanding but don’t know which corporate structure is suitable for your operations. Alternatively, you may also see businesses identify themselves as being a ‘branch’ or in more formal circumstances, as a subsidiary. In this article, we’ll explain how branches and subsidiaries work and what the key differences are between them.
Key points
- A branch is a separate physical office which is part of a larger company
- A subsidiary is a separate company whose shares are owned by a larger ‘parent’ company ‘
Corporate structures
Businesses can be structured in a number of different ways. At their most basic level, Australian businesses can operate under a sole trader, partnership or company structure. For the purposes of this article, we’ll only be covering company structures. Both branches and subsidiaries are sub-categories that fall within this.
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Branch
A branch is a part of of a larger company. All branches are the same company, however they are just physically present in multiple locations. Having this type of set up allows the company to have a wider reach and provide services to a larger number of people. It’s important to note here that all branches will carry out the same operations as the head office. Branches use all the same marketing materials, however they may have different sales targets or compete with other branches for the most sales within the company.
Example
Event Cinemas has multiple branches (locations) throughout Australia however report back to their parent company, Event Entertainment.
How are branches different to franchises?
Branches are different to franchises because branches are a simple extension of the company. Franchises however, are operated by franchisees who enter into an agreement with a larger franchising company. This agreement entails paying a fee to the franchisor, but retaining the bulk of the profits. Branches are not financially independent.
Subsidiary
A subsidiary is a company whose control and ownership is handled by another business enterprise (normally a larger company). In this sense, a subsidiary is a legally independent company on its own, but it’s shares are held by another company. This is a very common corporate structure for larger businesses. Further, many mergers and acquisitions result in one of the companies becoming the subsidiary of another.
Some well-known subsidiary companies include:
- Porsche cars (a subsidiary of Volkswagen)
- Warner Bros (a subsidiary of TimeWarner)
- Bankwest (a subsidiary of the Commonwealth Bank of Australia)
- 20th Century Fox ((a subsidiary of the Walt Disney Company)
The Corporations Act 2001 (Cth) section 46 outlines the requirement for a company to be a subsidiary as follows:
- Holding (parent) company controls the composition of the subsidiary’s board
- Parent company controls greater than 50% number of votes in a general meeting of the subsidiary’s board
- Parent company holds more than 50% of the issued share capital of the subsidiary company
Example
Event Hospitality & Entertainment Limited (EVENT) is the parent company with subsidiaries in Event Entertainment and Event Hospitality. With each subsidiary having its own different brands like Event Cinemas.
Key differences
Branches and subsidiaries may have some similar characteristics, but they are very different corporate structures. The differences include:
Where/who they report to
A branch runs the same operations as the head office whereas a subsidiary company is purely reporting to the holding company.
Resources and systems
A branch will use the resources and systems used by the company it belongs to. By contrast, a subsidiary can do this as well, but they can also use their own operating systems and resources.
Branding
Branches will share the branding of their parent company. All logos, fonts, messaging and slogans will be one and the same. For subsidiaries, they will more often than not have their own branding. This is why you’d be forgiven for not knowing that St George Bank is actually a subsidiary of Westpac Bank.
Legal status
A branch has no separate legal standing whereas a subsidiary company is a completely separate legal entity with a different identity. If a branch is being sued by a customer, they are suing the company it is a part of. Alternatively, a subsidiary can be sued in its own right (though it will have access to the parent company’s resources).
Liability
A branch’s liability extends to its parent company whereas for a subsidiary it does not extend to the holding company. A subsidiary is liable on its own. Branches have joint maintenance of their financials whereas subsidiaries maintain their own separate financials. Investment for a branch is 100% from the parent company whereas for a subsidiary it is purely ownership greater than 50%.
Conclusion
Essentially branches exist to expand customer reach whereas a subsidiary company is the result of a company’s broader expansionist strategy. It is also important to note here that different countries have different laws surrounding this. For example, in Australia, mergers are illegal where they will have the effect of substantially lessening competition. Opening a branch or acquiring a subsidiary requires legal advice from a commercial lawyer.
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