Legal entity setup overseas: is it really what you’re looking for?
When your company leadership decides to expand into a new country, one of the first things that you’re likely to hear is how important it is for you to start up a new legal entity in that country. Short-term employee trips may be satisfactory for exploratory visits, but for any significant business relationships, a formal legal entity is needed. So, with this in mind, here’s a closer look at what it takes to set up a foreign business entity, and when you should look into employment without establishment in a country of your choice.
Why Open A Subsidiary?
A subsidiary, legal entity, or any other term that you want to use, describes the foreign arm of a multinational company that does business in said country. Technically, a given company could have as many legal entities as it has countries it does business in, one in Taiwan, one in the UAE, one in Germany, for example, and so on.
One thing that is going to have a major ripple effect for your foreign branch is what structure you decide to take. Whether you choose to go into incorporation or create a stand-alone subsidiary, this impacts your tax liability, business capabilities, and more. Here’s a look at all the major entities that can employ staff, and what sets them apart:
- Subsidiary: This is the most formal structure possible, which brings some key benefits, like the ability to have 100% foreign ownership. The trade-off here is that this is also the most expensive and difficult to set up. Note that some countries have required capitalization for any subsidiaries.
- Branch: Branch offices keep a lot of the benefit of a subsidiary, and are generally easier to register or capitalize. The trade-off here is that the laws of some countries mean you can only do marketing and sales work from a branch office.
- LLC: Some countries require you to have a percentage of local ownership to do business. This makes the LLC an appealing option. As a limited liability company, shareholder exposure is limited based on the amount of investment that they put in.
- Representative office: This is the most limited of all options on this list, generally designed to allow a company to do marketing and other non-transactional practices.
Advantages/Disadvantages Of Setting Up A Business Entity
One thing that doesn’t get discussed as much as it should is whether or not trying to set up a business entity can actually hurt your expansion plans. Here are some examples of positives and negatives in this regard.
Compliance. This is probably the obvious advantage. You can’t legally hire and manage employees unless you have some form of legal entity. There are alternatives out there that are arguably better suited for a lot of companies, though. We will discuss those later on.
Flexibility. Depending on what type of setup format you use, your company will have a lot more versatility in terms of business actions in the new country. If you are willing to make the investment to set up a full subsidiary, you have an entirely separate legal entity to work with.
Outright restrictions. In some countries, like in Saudi Arabia, there are limits on who can open a business in certain industries. For example, if you wanted to get into oil there, you would need to partner with a local. Naturally, this takes time to find a business partner you want to work with.
Bureaucracy. Setting up even a foreign branch or representative office still requires you to fill out a variety of forms and communicate with different government agencies in your country of choice. Language barriers and cultural barriers can make this difficult, and COVID-19 is slowing things even more.
We’ve compiled a brief comparison of a few countries across the globe that have varying requirements concerning local company setup.
When can a Legal Entity Setup be Justified?
Company setup in a foreign country can be justified in the case of a company having international headcount over 20 employees. If you’re dealing with a smaller headcount, a global PEO solution will be able to satisfy your needs cost-effectively.
A company setup is closely connected with ongoing expenses that have to be taken into consideration during the decision-making process. The cost a business has to invest borders on $20K for legal company setup with an additional 40 thousand annually spent for maintenance. The process will take three to four months and this time has to be allocated too.
A global PEO tackles this pain point by cutting you as much as 60% of expenditures, while still providing you with the desired result: presence in a new country and active operations.
Many companies see the decision to set up subsidiary companies as a critical function of doing business abroad. However, as we’ve pointed out, there are positives and negatives to taking such a route. However, due to a lack of industry knowledge, many people assume that building a legal entity abroad is the only way to expand while staying in industry compliance. Not necessarily. Rather than go through the bureaucratic process, you can opt to use a global PEO provider, like Acumen International. We can help you in over 190 different countries. By taking the burden off of your hands, we serve as an alternative, agile approach that supports modern global employment needs.
Ultimately, the main benefit of using a global PEO versus a new entity for your business setup abroad is a lack of administrative/cost burden. Your global PEO provider will handle the complex logistics of staying compliant and managing your international employees without a legal entity. However, you ultimately have the final say on what gets done. Also, by going this alternative way, you still get the largest benefit that setting up a foreign entity could give you – which is expanding your presence in a new and lucrative market.
Reach out to us today for more information.