Global-first businesses are the future, and there are huge advantages to building international teams and expanding your company abroad. But how you go about that process is often a tricky question to answer.
One popular option for global businesses is opening a foreign subsidiary (otherwise known as a “local entity”). However, that’s a big commitment and one that requires careful consideration. So before you take the leap, let’s weigh up the pros and cons of setting up a local entity to help you decide.
Local Entity Pros
Let’s start with the good news. Opening a local entity - when the time is right - can offer your business some great benefits.
Full Control over Business & Processes
Having a local entity, particularly a foreign subsidiary, gives you autonomy over how you run your business and processes - within the bounds of local laws. In many countries, you’re free to import and export goods, employ and manage workers directly, and build out large local teams. If you’re hiring staff remotely through contracting, outsourcing, or an Employer of Record instead, this isn’t always possible. Sometimes you also need a local entity in order to get the required licenses to operate in the country, such as in the insurance sector.
Brand Trust in New Markets
Building a credible brand abroad can be hard, especially if you’re competing with well-established local businesses. That’s where having a local entity can help. Local businesses, governments, industries, and consumers may take your business more seriously because it complies with all local regulations. This can boost brand trust and recognition, making your expansion more successful.
Long-term Financial Benefits
In some jurisdictions, companies with an official local presence can benefit from subsidies and grants where foreign businesses would not. It can also give you better access to local resources and assets, such as property. Additionally, foreign subsidiaries are treated as separate financial entities from their parent companies, so it can be advantageous for tax reasons too.
Local Entity Cons
While establishing a local entity could be beneficial for your company, you should also consider these drawbacks.
High Costs
The initial set-up and running costs of establishing a local entity can be very expensive. Upfront professional fees average around $15,000, while initial share capital requirements can cost anywhere up to $500,000 depending on the country, the industry, and any applicable licensing requirements. Ongoing professional fees for filings and a resident director could set you back up to $20,000 a year.
Lengthy Process
Setting up an international entity can take anywhere from two months to more than six months - and with ever-increasing anti-money laundering (AML) requirements from banks globally, this time is only increasing.
This process takes up a lot of resources and, crucially, management resources. Most of the documents have to be signed by a director, so these administrative tasks cannot be delegated. Factor in multiple trips to a notary or even an embassy for certain countries, and you’re looking at months of disruption for the most vital people in your business.
Complexities of Staying Compliant
Every country and jurisdiction has its own laws and regulations concerning corporate set-up, taxation, and employment. Many require a local citizen or local resident to be a director of the business, and some require these people to have specific career experience or qualifications. What’s more, post-Brexit, some EU countries will not accept a UK director and demand EU citizens only.
If you don’t comply with these ever-changing regulations, your business could incur irreparable legal, fiscal, and reputational damage. Many of the businesses we speak to on a daily basis tell us that they simply don't have the legal, tax, and HR muscle to stay on top of this internally and that hiring local lawyers to provide that expertise is an expensive option.
Exit Challenges
If you find your new market isn’t as lucrative as expected, closing down a local entity can be almost as challenging as setting one up. Before establishment, be sure to look into how easy it is to withdraw your presence from the region too.
So, Should You Open a Local Entity?
Ultimately, setting up a local entity abroad is a huge resource and time commitment. Not only do you have to consider the short-term expenses of opening up a local entity, but you also have to take into account the ongoing costs that are required to maintain it. So, here are the two main questions you should ask yourself:
“Is my business ready to take on the additional upfront costs, HR administration, and legal burden of opening and running our own entity? And are we sure about committing to this particular country over the long-term?”
It’s worth waiting until you’re certain that this is the right way forward for your business. For example, if you’re expanding into new markets, always test the markets out and validate them before setting down more permanent roots. That means conducting extensive market research, staying agile, and hiring people on the ground to put out feelers for demand.
On the other hand, if you simply want to hire the best people no matter where they are in the world, opening a foreign entity (or multiple entities) probably isn’t the best route for you. Instead, it’s quicker, less expensive, and less risky to use alternative methods, such as an Employer of Record (EOR) service.
EORs enable you to hire, pay, and manage international talent compliantly by employing talent on your behalf. That way, you don’t need to establish a local entity. Your chosen EOR provider will take care of employment compliance for you, including employment contracts, payroll, benefits, and more.
Ultimately, using an EOR can be much more cost and time-effective than setting up a local entity if your primary goal is to hire top talent globally. It can also act as a stopgap solution while you’re preparing to set up an entity of your own.
Take a look at the table below to see a general comparison between setting up a local entity vs. using an EOR.
