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3 Signs You Shouldn’t Establish a Foreign Entity

By March 18, 2020September 11th, 2022No Comments

Setting up a foreign legal entity remains a common global expansion method for businesses of all sizes, sectors, and needs. Despite its prominence, entity establishment comes with steep costs, long-term commitments, and limited flexibility—each a critical component that makes global expansion more complicated than it has to be.

While entity establishment may be the right move for businesses with significant financial resources and teams with high headcounts, most companies (especially tech startups and scaleups) do not have the resources for such a time- and cost-intensive global expansion method.

This post highlights critical signs that your firm likely does not need to establish a foreign legal entity but instead should take advantage of a simplified, proven global expansion alternative.

Sign #1: You Have Limited Financial Resources

No matter your company’s age, spending funds in the most cost-effective manner is common sense—especially when it comes to an endeavor as daunting as expanding your services overseas. But for young companies, especially, entity establishment can quickly dry up funds in short supply. Foreign entity setup costs, on average, $20,000. In addition, annual maintenance costs can amount to $200,000. While these figures vary by market and scope of your expansion needs, firms must perform due diligence to explore which markets make the most financial sense before expanding.

But setup and maintenance costs aren’t the only expense businesses must consider. Companies must also factor in opportunity costs: are their financial resources allotted to entity establishment better spent elsewhere? What opportunities do they lose in the time it takes to set up an entity?

Sign 2: You Aren’t Sure How Long You’ll Be in the Market

Not all firms move into markets planning to remain there indefinitely, especially concerning markets facing political, economic, and social unrest. In these markets, in particular, entity establishment can make what should be a somewhat smooth exit into a lingering, expensive process.

Many companies want to test a market before establishing a legal entity, whether through short-term projects or employing a single employee in that market. Businesses should not establish an entity if they cannot commit to a market for a minimum of five years—even under the most favorable market conditions.

If a market does not prove valuable (or more promising opportunities emerge elsewhere, and your firm needs to reallocate funds, talent, and resources to this new market) the high costs, slow timelines, and avoidable headaches associated with entity dissolutions create additional challenges.

Sign #3: You Need Flexibility to Grow and Explore Other Markets

Global expansion comes with uncertainties that can unexpectedly end or drastically alter a firm’s presence in international markets. To mitigate the risks of an early exit and other financial or personnel challenges, firms need maximum flexibility to hire and expand elsewhere—flexibility that entity establishment does not afford.

All firms must consider whether or not they will hire in-country talent or relocate experienced team members from their HQ or other offices. For firms deciding on the first option, it is sometimes difficult to predict how many employees they need to hire or how large their team may grow in one country.

If a firm only hires a small handful of employees in a single market, entity establishment’s costs quickly become prohibitive, unless that market is uncharacteristically lucrative. Firms whose global expansion endeavors generate significant income streams may find it beneficial to grow their headcounts beyond their original plans to both accommodate and accelerate this growth.

Firms must also consider expansion plans beyond their target market. If new opportunities emerge elsewhere, firms with entities likely lack the financial resources and flexibility to explore these opportunities.

Even if a firm has the internal and financial resources to pursue entity setup, executive teams spend an average of 160 hours researching and completing necessary steps to complete the setup process. This time is valuable and much better spent managing teams to keep their business running smoothly.

Go Global Without the Restrictions of Entity Establishment

Global expansion is essential for tech firms’ continued growth, increased international awareness, and staying ahead of their competition. But firms must strongly consider whether or not setting up a foreign legal entity is the right move for their needs. If entity establishment’s financial and time restrictions create undue strain, then companies must explore simpler options to take their brand onto the global stage—like International PEO.

Velocity Global’s International PEO (Professional Employer Organization) solution reduces costs, time-to-market, and provides unparalleled expert support when compared to entity establishment. If you’d like to learn more about how International PEO has helped firms of all sizes and sectors realize their global expansion goals and how it can do the same for your business, reach out to Velocity Global today.