Group, illegitimate group, associated company. Dear children have many names named for it. In this case, however, the parable doesn't fly all the way. But if we must now continue down this wrapped metaphorical path, we could say that we are rather dealing with a sibling crowd. All of them represent economic constellations and really differ only when it comes to the share of ownership. So, similar, but not exactly the same. But let's take it from the beginning.

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So, what is a business group?

A group is defined as an economic constellation consisting of a parent company and at least one subsidiary, in which the parent company has a controlling influence. We can therefore say that a group, at least in the normal case, arises when the parent company acquires either a direct or indirect majority of the votes in the subsidiary. Important to remember is also that a group relationship can only arise between legal entities. We cannot therefore speak of a group if a private individual owns two companies.

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How are parent companies and subsidiaries defined?

‍According to the Swedish Annual Accounts Act, a controlling influence is a prerequisite for being able to talk about parent companies and subsidiaries, and thus also a prerequisite for a group relationship between two legal entities to arise. It is through a controlling influence that one can classify company X as the parent company of subsidiary Y. But what do you really mean by that? If we zoom in, and take a closer look at the text of the law, we can see that a controlling influence is defined as follows:

Company X is defined as a parent company and company Y is defined as a subsidiary in the case that company X would:

• hold more than half of the voting rights for all shares or units in Company Y

• own shares or units in company Y and, due to agreements with other shareholders, have more than half of the votes in respect of all shares or units.

• own shares or interests in company Y and have the right to appoint or remove more than half of the members of the company's board of directors or equivalent management bodies.

• own shares or interests in Company Y and, by virtue of an agreement or a provision in the Articles of Association, the Articles of Association or other comparable statutes, have the right to exercise sole control of Company Y.

• together with one or more subsidiaries, have a controlling influence, in accordance with the principles set out above, in company Y. ‍

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Why form a group? What are the benefits?‍

The obvious advantage of having a group is the possibilities for coordinating the economic activities of the different activities. Governance and monitoring of operations and responsibilities will be easier and there are also financial and tax advantages of forming a group. Group formation thus creates several synergies, as the coordination of production, purchasing and marketing, for example, becomes more streamlined. At the same time, it is usually also possible to draw an equal sign between more companies and more administration, which often means increased costs. For example, a group imposes higher requirements on accounting and auditing, since in some cases groups also need to draw up special consolidated financial statements.

That the possibilities for coordination are getting better sounds rather abstract and fuzzy. Nor may it be the best selling argument for group formation. So let's mention some economically tangible benefits of a group relationship:

• Enabling loans. A group relationship makes it possible to borrow between companies, which is usually not allowed between companies in an illegitimate group.

• Tax equalization. Swedish wholly owned companies can make group contributions within the group, which enables tax equalisation. Thus, through the group contribution, companies can in principle choose which company (s) within the group are to pay income tax. For example, if a company makes a loss, other companies within the group can cover the loss through a group contribution and avoid paying corporation tax.

• Spreading out the risks. Not putting all your eggs in the same basket is perhaps the most classic piece of advice for all forms of financial commitment. And it is for a reason. It creates security and financial security. With a group, you do just that, you spread out the risks by allocating different types of operations into different types of companies. For example, you can take out more secure assets such as real estate in a separate company and conduct a riskier business in another.

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‍What is an illegitimate company?

‍Just like a genuine group of companies, an illegitimate group is a group of companies, but owned or controlled by the same person or persons and without formally constituting a group formation according to the criteria of limited liability companies. In other words, it does not exist by a parent company at the top, with subsidiaries underneath it, at least not in a pure legal sense. Therefore, illegitimate groups do not have the rights or obligations that statutory groups have. However, there is nothing to prevent the owner or owners from practically managing the companies as a group. ‍

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What is an associate company?‍

An associate is usually defined on the basis of two criteria: there must be a ownership interest and a significantinfluence in the company. In turn, a shareholding is usually defined by an equity holding of at least 20% in the company, while a significant influence is usually defined by a holding of at least 20% of the voting rights. However, there are more ways in which significant influence can be achieved. For example, a company can be considered to have a significant influence in another company if the company is represented on the board of directors or participates in strategic work. There may also be significant transactions between the companies.

Link to the article on group accounting