4 Things To Consider For Your New Subsidiary Company

Now that your organisation has decided to un-merger itself or breakaway from the parent company, what are the next steps? There are bound to be a lot of restructuring amongst and within departments. One pain point would be the handling of payroll under this new circumstance. Given that a subsidiary operates as a separate entity from the parent company, how should payroll be handled now? Here are a few strategies for tackling payroll as a subsidiary firm.

1. Separate Accounting

The accounts for the subsidiary and the parent company should be separated. This means that the subsidiary firm should have its own ledger, profit and loss statements and tax filing responsibilities. If a subsidiary fails to do so, the government board responsible for taxes or other agencies may end up considering your subsidiary as a branch instead. This might result in loss of legal liability protection you have gained by forming a subsidiary.

2. Separate Bank Accounts

Given that the accounts between the subsidiary and parent company are separated, this would naturally mean that the bank accounts should be kept separate as well. Furthermore, you should avoid shifting funds to and fro between the parent company and subsidiary so as to prevent the possibility of commingling of bank accounts for fraudulent activities. Ensure that every transaction between the parent and subsidiary company are properly documented and accounted for.

3. Taxes

If the subsidiary is registered as a limited liability company (LLC), it does not have to pay income taxes and the tax burden will instead, lie on the parent company. However, do note that tax legislations differ between countries. In Singapore, subsidiaries are eligible for tax exemption of paying no tax on the first S$100,000 of chargeable income for its first three consecutive years. Be sure to familiarise yourself with the tax regulations where the subsidiary firm is being set up to avoid hefty tax penalties.

4. Separate Payroll

The parent and subsidiary firm must have separate payroll systems and pay their employees separately. The parent and subsidiary are considered as two “separate companies” and thus, each should issue payroll cheques to their employees separately. For example, the each company may have its own unique tax reference number that allow the tax board to identify the contributions made by the respective company. Furthermore, for subsidiaries who have their own tax burden, having a separate payroll from their parent company is critical to prevent co-mingle of payroll and tax payments.

Before setting up a subsidiary, ensure that you are well-versed with the country’s legislative requirements before jumping headlong into it. This is critical to prevent yourself from incurring unnecessary legal liabilities and costly penalties.