Don’t Let Entity Structure Hold Back Your Global Expansion Plans

By: Bjorn Reynolds, CEO at Safeguard Global

Expanding a business globally is a significant step for any organization. It offers vast opportunities alongside significant challenges – one critical challenge being selecting the appropriate entity structure for international operations. This choice is pivotal as it impacts legal liabilities, tax obligations and the ease of business operations in the target country. What’s more, international laws and regulations are inherently complex, creating difficulties and leading to common mistakes.

The Organization for Economic Co-operation and Development (OECD) indicates that failure rates for businesses attempting global expansion range from 20% to 40%. Companies often erroneously assume that concepts and norms in overseas markets mimic those in the United States. However, legal protections and tax laws differ widely, and choosing an inappropriate entity structure can result in unexpected costs and legal problems. A 2020 report by the World Bank shows how complicated taxes can be worldwide, with international businesses having to understand more than 1,200 tax agreements and multiple local laws.

Understanding Entity Options

These consequences underscore the importance of choosing the appropriate entity structure, leading to the question – what are my options?

1. Representative Office: A Representative Office is simplest and ideal for market research, but it is limited in business operations.
2. Branch Office: Branch Offices act as extensions of the parent company, offers a broader activity scope but comes with increased liability and tax obligations and often needs a local manager for oversight.
3. Subsidiary: Subsidiaries provide maximum liability protection, enabling full-scale foreign operations and revenue generation independently from the parent company. While subsidiaries offer an established market presence and international credibility, they demand significant investment and understanding of local regulations.
4. Non-resident employer (NRE): It operates in a foreign market without having a permanent establishment in said country, which means that there is no legal entity.

Choosing the right entity structure is a critical decision with far-reaching implications – not just for the option you choose, but any other existing or future entities. The outlined options offer varying degrees of market access, operational scope and liability protection. And while your current structure may suffice for present needs, organizations should prioritize alignment with future objectives when planning their entity strategy.

Factors to Consider

Whether a company chooses to enter new markets to “test the waters” before making a substantial investment or opts to establish an entity structure independently, several factors should guide the decision to expand globally.

• Purpose. The purpose of your expansion should play a large role in determining entity structure. Whether a new operation plans to conduct research, sales, manufacturing, or provide services, each objective aligns with a specific structure. The nature of the business’s activity also counts because regulatory environments vary across industries and countries, impacting operations and compliance.
• Location. Company needs and expansion goals determine the location of an overseas operation. Access to target customers and skilled employees guides choices and aligns with business objectives and growth strategy. Given labor laws and talent availability, the intended operational scale also influences location.
• Cost. Companies planning to expand internationally must balance initial setup costs and ongoing maintenance fees, which range from $15,000 to $20,000 annually depending on the country, against potential ROI. These could pose challenges for some organizations. Additionally, if the company closes down the entity in the future, it may face significant costs and complexities related to dissolution.
• Time. The time required to set up an entity and begin operating depends on various factors. Some countries have relatively easy requirements, and company operations can be established within weeks. Other countries have more rigid processes that could take six to 12+ months to navigate.
• Compliance. A country’s employment laws also impact several areas. These include how and who the company hires, employment contracts, the frequency and method of employee payments, tax structures, and the types of reporting required.
• Banking. Efforts to fight crimes such as fraud and money laundering are intensifying globally, requiring strict adherence to updated regulations. For example, in Belgium, $67K in minimum capital is needed to deposit prior to incorporation. All organizations are even required to comply with “know your client” regulations, where in some countries, finalizing an account is done in-person. This task can impact the ability to set up the entity and hire employees.
• Accounting and Tax Laws. Countries usually have local accounting laws, which may include jurisdictional requirements to maintain records in both the local language and English. Setting up systems correctly is crucial to avoid compliance issues later. The choice of entity structure directly affects a company’s global tax liabilities. An incorrect choice can lead to inefficient tax arrangements and increased burdens, undermining financial health and growth.
• Culture. Consider the country’s work culture and language requirements when expanding a business, as local employees may have different work ethics, and legal documents may need to be in the local language or bilingual. Additionally, some countries mandate communication with authorities and legal documentation to be in the local language.
• HR. Companies must follow the local labor laws, benefits and HR requirements to hire employees in a foreign country. Something as simple as average paid time-off (PTO) in the U.S., cost more than double in the 20 most-developed countries. And in most cases, employment contracts favor employees and may include termination protection. Headcount is another consideration. For instance, establishing a subsidiary might be necessary for sizeable operations requiring a local workforce, while a representative office could suffice for smaller teams.
• Country Laws. Before expanding into new markets, businesses must research restrictions or prohibitions on foreign companies operating in specific sectors, as regulations vary and are subject to change. Choosing the wrong entity structure can severely impact company operations, straining finances and derailing long-term growth plans.

This list alone is a lot to consider for any organization, however this is the mere tip of the iceberg. The good thing is there are multiple resources available to alleviate the load. When a lack of speed or local expertise are among an organization’s top concerns, an Employer-of-Record (EOR) may be the best option for achieving global growth objectives, as they’ve already done the costly and arduous work of setting up entities around the world. This includes all the banking, insurance, tax, HR, facilities and contract requirements. They abide by local employment laws to create an infrastructure to employ and pay local workers.

The Value of Strategic Guidance for Successful Global Expansion

The value of strategic guidance for successful global expansion cannot be overstated. Tailored advice and insights are essential for navigating the complexities of international markets and avoiding common pitfalls.

When considering global expansion, the process can initially appear overwhelming, particularly if the destination is unclear. By addressing these questions and the factors above, businesses can clarify their expansion objectives and make informed decisions about where and why to expand internationally.