Stepping foot onto foreign soil regarding a business venture requires you to understand the foreign corporation definition and how it applies to your global expansion. Essentially, a foreign corporation is a subsidiary. Which is a distinct legal entity in a country for the primary purposes of liability, taxation, and regulation.
There are benefits and risks for firms looking to establish a foreign corporation in a new market. Whether or not this is the best option for a company is essentially dependent on the type of operations performed and what the needs are for the specific business. Let’s explore the foreign corporation definition to help you determine if this is the best option for your business.
Foreign Corporation Definition and Establishment Benefits
It May Be Necessary for Operations
If your company is in manufacturing or real estate, you will have to establish a foreign corporation to maintain operations overseas. Any business that requires you to hold equipment or physical assets needs this distinction. It cannot function with a Foreign Subsidiary as a Service (FSaaS) or through independent contractors.
Reduce Compliance Headaches
You can significantly reduce your worries with a service like FSaaS, but to achieve the highest level of compliance, you will need to set up of a foreign corporation. An entity will help your company with hiring requirements, tax regulations, and labor laws, allowing you to focus on your enterprise’s strategy for growth.
Also, your company will be recognized by local courts, so if you run into legal issues, you can fall back on them for assistance, which will come in handy with any contractual disputes regarding independent contractors.
The downside of compliance is keeping up with the constantly changing regulations. Plan on hiring a staff member to keep up with compliance changes to ensure that your company is meeting all the requirements.
Develop Trust in the Marketplace
Foreign corporations may experience more trust from international markets because they are displaying a strong commitment to that country by establishing a legal entity. It’s not always necessary to establish a subsidiary to gain trust in foreign markets, but it doesn’t hurt. This market presence is also not free from additional expenses. This includes increased local maintenance costs, tax complexities, and local signatory requirements.
Risks of Establishing a Foreign Corporation
Many In-Country Requirements
Establishing a foreign corporation comes with an extensive list of requirements that must be performed locally, which makes sense. Your company has a legal entity in a country, and must act on its established presence in the new market. These requirements include:
- Signatories on bank accounts and corporate documents must often be signed in person.
- A Resident Director who manages your bank accounts. You can use a staff member or outsource this position.
You must ensure that you trust your local Director because they have complete control of your assets.
Initial Costs and Time Requirements
Establishing a foreign corporation is not cheap. You can expect to pay between $15-20K to set up a subsidiary in your new market. This can take between 3 to 4 months. If you have potential candidates waiting to get onboard, you may lose your talent during the waiting period if they find another position and decide to accept.
Maintenance Costs and Time Restraints
Maintaining a foreign corporation is even more costly. For one employee, your company can spend $40K USD per year in hard costs on average. Plus, if your operation does not work and you need to move in a different direction, plan on taking both the start-up time and cost and multiply them by a factor of 3.
Post 9/11 International Banking
One of the most important requirements for establishing a foreign corporation is the need to open a foreign bank account. When living in a post 9-11 world, there are new regulations on international banking. These include Know Your Customer (KYC) and Anti-Money Laundering that make it tough for business owners. Do your research and make sure you understand the complexities of international banking before diving into the process.
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Now that you know the basics of the foreign corporation definition, it’s time to decide if this is the best decision for your company. It can be overwhelming, which is why Velocity Global created FSaaS to establish a legal entity in over 185 countries.
If you’re looking to hire employees in Brazil and start selling your product in a new community, this options reduces your time to market by up to 90% and virtually cuts costs in half. Give us a call today to explore these options.
