Legal Structures

There are a wide range of business structures available in the UK ranging from sole trader through partnerships to private and public companies.
However for an established overseas companies seeking to do business in the UK the more usual legal entities to consider are

Place of Business

A place of business is premises where there is a physical or visible indication that the company may be contacted there but where the business carried on at that place is only ancillary or incidental to the company's business as a whole so does not amount to a branch.

Branch

A branch is a part of a company that is organised so as to conduct business on behalf of a company as opposed to carrying on business which is merely ancillary or incidental to the company's business as a whole. In other words a person will be able to deal direct with a branch of the foreign company in Great Britain rather than with that company in its country of incorporation.

Subsidiary

A subsidiary will normally be in the form of a UK limited liability company whose shares are wholly owned by the overseas parent. Limited company status turns the UK presence into a distinct legal entity separate from its owners. A company is easy and cheap to set up in the UK where the minimum capital requirement is £1 which is not the case in many neighbouring European countries where the requirement s are much more rigorous and costly.

Considerations

Generally once an overseas business has made the move to enter the UK market the choice will distil down to a straight decision between opening a branch or a subsidiary in the form of a UK limited liability company. The choice rests on several factors and the advice will depend in each case on the particular circumstances and priorities of the business. The following areas should be considered.

Advantages and disadvantages

Limited Liability

A branch is not a separate legal entity from the parent company but merely an extension operating under the laws of another jurisdiction. As such, it does not provide the limited liability that a subsidiary company does. If the nature of the business is such that it is important to ring-fence liabilities arising in a specific jurisdiction, the subsidiary will afford the safer option.

Commercial credibility

A subsidiary is often preferable because some UK companies would prefer to do business only with other companies incorporated in the UK. Grants, loans and other finance may also be easier for a UK company to arrange.

Disclosure of accounts

A subsidiary company is required to file its accounts with Companies House each year. These are then a subject of public record. The information disclosed in this situation is limited to the operations of the UK entity. In the case of a branch operation the accounts of the overseas company which is effectively trading in the UK (as the branch is not regarded as a separate entity) must be filed with Companies House in the UK. Where the accounts of the holding company are in a foreign language they must be translated. Overseas companies who are not required to file in the home territory may find this particularly unwelcome. This can however be circumvented by setting up a subsidiary in the home territory whose sole purpose is to trade in the UK.

Audit

A UK branch does not require an audit but a subsidiary company will require an audit if it is part of a group whose worldwide turnover or balance sheet value exceeds the UK audit threshold (currently Turnover £6.5m or balance Sheet £3.26m).

However, even if a small company meets these criteria, it must still have its accounts audited if this is demanded by a member or members holding at least 10% of the nominal value of issued share capital or holding 10% of any class of shares; or - in the case of a company limited by guarantee - 10% of its members in number. The demand for the accounts to be audited should be in the form of a notice to the company, deposited at the registered office at least one month before the end of the financial year in question. The notice may not be given before the financial year to which it relates.

Taxation

The relevant considerations are normally the tax system in which the overseas company does business, the terms of any double tax convention with the UK and the expected trading results in the UK.
A subsidiary can only carry losses forward against future UK profits whereas a branch maybe able to offset losses against profits from other territories.
Sometimes it is more advantageous to start with one structure and then to transfer the UK business to the other structure. For example, the starting up costs and initial trading losses of a branch may be deductible from taxable profits of the overseas company in its home country but this advantage will be lost when the UK branch becomes profitable in its own right.