Expansion is often a pivotal step towards achieving sustained success. As SMEs contemplate avenues for growth, the distinction between associate and subsidiary companies emerges as a strategic consideration. These alternative structures offer SMEs varying degrees of ownership, control, and integration, each presenting unique opportunities and challenges.
In this article, we delve into the nuances of associate and subsidiary companies, shedding light on their relevance and implications for SMEs embarking on expansion initiatives.
Associate Company
An associate company refers to a company in which another company (investor company) has significant influence in, by virtue of owning at least 20% of shares in it (associate company). The stake is usually between 20% to 50% to ensure the associate has control over the company. While the investor does not gain a controlling interest in the associate company, it allows them to exploit some of the associate company’s strengths. It also helps them tap into new markets.
An example of an associate company is Subaru where Toyota owns 20% of its shares.
Subsidiary Company
Where a company’s shares are fully or partly held, owned or controlled by another company, the company owning the shares is referred to as the holding or parent company whereas the company whose shares the parent company owns becomes its subsidiary. The stake held by the parent or holding company is usually more than 50% to ensure that it has control over the subsidiary. The Companies Act also defines a subsidiary as “a company of which another company is its holding company”. A subsidiary can also be wholly owned by an investor company but even when so, it remains as a separate legal entity from the parent company.
An example of a subsidiary is Gerber Ltd which is a subsidiary of Nestle Holdings.
DIFFERENCES BETWEEN ASSOCIATE AND SUBSIDIARY COMPANIES
1. Share ownership
The key difference between an associate company and subsidiary company is the share ownership of the investor/parent company. An associate company has majority shares as the investor can have only between 20% to 50% of shares, whereas, a subsidiary company has minority shares with the parent company owning more than 50% of the shares.
2. Control
An associate company has majority shares which allows them to have control over their operations, yet it allows the investor company to have significant influence on their decisions. On the other hand, a subsidiary has minority shares giving the parent more control and thus the parent company is completely integrated into its operations and decision-making processes.
3. Accounting and financial integration
Subsidiary companies follow the IAS 27 criteria for accounting while associate companies use IAS 28. Subsidiaries normally prepare their independent financial statements which are then consolidated with those of the parent’s and presented as those of a single economic entity whereas associate companies’ financial statements are not consolidated.
CHOOSING BETWEEN AN ASSOCIATED COMPANY OR A SUBSIDIARY COMPANY
When choosing between the two types of companies, it is important to look at the pros and cons of each. Having a subsidiary tends to be a cheaper way of expanding into new markets as opposed to other ways which include mergers. Subsidiaries are a good way to access new resources while also benefiting from available tax benefits depending on the jurisdiction.
On the other hand, associate companies are a good way to reach to establish strategic alliances and collaboration without being fully acquired or controlled. This way associate companies are able to traverse their business objectives while still maintaining a significant level of independence unlike in a subsidiary. Investor companies can use the strengths and resources of associate companies and create synergy that will benefit both companies However, it is important to note that there is limited control for the investor company over the associate. In addition, associate companies complex financial structure make them prone to more money laundering schemes.
CONCLUSION
Overall, the financial and operational implications of the two types of companies are different and need to be considered when choosing between the two. The business objectives of entities should be clearly articulated and examined to identify the most suitable business model. It is thus imperative that applicants seeking to invest or register an entity have a clear picture of the features, operational management, resultant obligations and benefits accruing from the business model they choose.
How we can help
The team at CM SME Club is well versed in matters relating to business set up advisory and registration, post incorporation registration, regulatory compliance, corporate restructuring, corporate governance, contract drafting and review.
We advise various stakeholders on setting up business and investment structures or business that are most suitable for the achievement of their objectives.
We also offer tax advisory services and procure the relevant work permits for the non-Kenyans and expatriate employees as well as their dependents. We draft and review the requisite contracts, deeds and agreements to be entered into as between parties. We take care of your regulatory and compliance issues in a constantly changing regulatory environment so that your business can focus on its substantive activities.
Reach out to us at law@cmsmeclub.com for assistance
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