The Branch and the Subsidiary are well-known structures in the business landscape. Although they seem identical on the surface, there are some fundamental differences that make them a distinct structures altogether. In this write-up, we shall drill down the concept of both these structures and find out the key differences. With that being said, let’s get started with our topic, i.e. Subsidiary vs Branch.
What is a Branch?
- Branch office refers to an establishment formed by main/primary company either to expand their sales or augment the service network.
- Branches are more of an allied establishment that help parent company extends customer reach.
- Branches are a part of the parent entity, which are obligated to undertake business affairs underpinned by the parent company.
What is a Subsidiary?
The subsidiary[1] is usually formed in the event of a merger or acquisition. The control of the subsidiary is in the hand of its forming company, technically known as the parent company. Typically, the parent or holding holds more than 50 per cent of the shares in its subsidiary, making it a prime controller of such a company.
Subsidiary vs Branch: Legal differences
| Subsidiary Company | Branch office | |
| Approving Authority | Ministry of Corporate Affairs i.e. MCA | Reserve bank and MCA |
| Registration conditions | Minimum No. of Directors: 2 in case of Private ltd. company and 3 in case of Public ltd. company; Minimum No. of shareholders: 2 in case of Private ltd. Co. and 7 in case of Public ltd. Co.; Registered Office: The Registered office shall be situated within any Indian state | The net worth of the overseas entity should be above $100000. The overseas head office should not be encountering looses for past three years. |
| Registration in India | An incorporated entity falls under Companies Act, 2013. It is generally a Pvt.Ltd.Co for a closely held shareholding It has legal and distinct status when compared to shareholders |
Companies incorporated outside Indian
territory involved with different undertaking can establish a branch office
in India with the specific consent of RBI |
| Liabilities | Liabilities limited to subsidiary | Liabilities extend to holding company |
| Reporting | Parent entity | Head office |
| Business undertakings | Subsidiary may or may not get engaged with business affairs similar to parent entity | Branch office is obligated to conduct main company’s business affairs |
| Independent Legal status | Yes | Yes, as far as Taxation and MCA filings are concerned. |
| Ownership | The holding entity has more than 50 per cent ownership interest in the subsidary | The holding entity has 100 per cent ownership interest in the branch |
| Exchange control |
Outflow: allowable as Dividend, Royalty, technical
or service fee
Inflows: permissible as Equity or Loans | Outflow: Remittance of profits post addressing of tax obligation Inflows: permissible as transfer from HO |
| Prior consent from RBI | No | Yes |
| Submission of annual certificate with Reserve Bank | No | Yes |
| Conducting board meeting and members meeting | Yes | No |
Subsidiary vs Branch: Generalized differences
The difference between these two structures lies in how they execute, how they report, what management hierarchy they follow, and so forth. The following facts draw a line of distinction between these two popular business structures:
Scope of operation
As the name suggests, the branch is part of the main business, commonly termed the head office in India. They are obligated to operate in a way suggested by the main business. Also, they are not allowed to deal with undertakings other than directed by the main company. Their scope of operation is entirely dependent on the discretion of the main business.
The subsidiary, on the other hand, has significant liberty in this context as they are allowed to operate independently with autonomous management to accomplish the parent company’s goals.
Management Structure
Branches entirely belong to the main business and are obligated to operate as per the private company directions. They are not allowed to have different management to accomplish business goals. In short, they are bound to align themselves with the managerial directions coming from their main business.
The subsidiary is more flexible in this regard. The governing legislation permits them to have a proper management hierarchy in place to run their business affairs.
Purpose
Companies usually form Subsidiaries to serve a purpose like Tax benefits and Risk diversification. Presence of subsidiary means that the parent company does not have to solely take the toll of major financial blows or heavy taxation. Such risks can be shared with the subsidiary accordingly.
Branches are not set up for this purpose. The primary goal behind their establishment is to ensure widespread customer reach or reap more sales. The concept of taking part in the company’s major decision making does not exist for branch offices. The subsidiary, on the contrary, has marginal leverage in this context.
Legal status
Even though subsidiary adheres to independent legal status, they are prevented from acquiring the shares of their parent organization. The same is also true for branch offices[1]. Setting up a subsidiary is more of a formal way to diversify the business footprint. Meanwhile, branches only exist to accomplish the business target underpinned by the governing company.
Governing Provisions
There are independent provisions under the Companies Act, 2013 that regulate the constitutional framework of subsidiary companies in India. By contrast, as such, there are no provisions that obligate branches to operate a certain way. In fact, their entire operation and activities are formulated and implemented by their parent company.
Conclusion
Branches and subsidiaries are not similar business structures since they all serve different purposes. Where branches help businesses increase customer reach, subsidiary only comes into existence to strengthen the parent’s company expansion strategy.
The subsidiary is more organized in the way they operate and manage their affairs; meanwhile, branches solely depend on its forming company’s directions to serve pre-determined business goals. Let us know by writing us about any query around Subsidiary vs Branch; we shall be obliged to assist.
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