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10 Reasons You Should Not Create a Foreign Subsidiary

By July 17, 2015 October 8th, 2019 No Comments
10 Reasons You Should Not Create a Foreign Subsidiary

Picture this scenario: it’s time to “establish” yourself in a new country and/or you are wanting to secure a great hire in a foreign market.  The first logical thought is, “I need to establish a foreign subsidiary in this country now in order to gain a foothold and be able to start securing employees there.” This thought process 10+ years ago was entirely correct; you would need to go down this path, spend a ton of time and money, and ultimately have another company to manage.  In today’s volatile environment, does it really make sense to create another liability?  We say “No” for 9/10 companies (at least when first entering a market) and can offer an alternative that is inline with the modern day “Agile” environment and sharing economy.  If you aren’t sold yet, here are ten headaches you can expect when you create, maintain, or dismantle your foreign subsidiary:

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1. Initial Cost

A foreign subsidiary is expensive to set up.  It may cost you $5K in the UK to set up a Ltd company, but it will cost you $35K in Brazil to set up a Limitada.  But on average plan on spending $15K-$20K.

2. Maintenance Cost

Foreign subsidiaries cost a lot to maintain.  For just one employee you can expect to spend $40K per year in hard costs, on average.

3. Set Up Time

Foreign subsidiaries take a long time to set up.  It may take you 2 weeks in the UK but it will take you 8+ months in Brazil. On average plan on 3-4 months set up time.  Unfortunately, your business demands often can’t wait that long.

4. Dissolving Cost/Difficulty

A foreign subsidiary is like the Berlin Wall when it comes to tear down.  What happens if that person you hired doesn’t work out or the strategy shifts?  Take both the start-up time and cost and multiply them by a factor of 3.

5. Post 9/11 International Banking

If you haven’t gotten scared yet, you should now.  A foreign subsidiary requires foreign bank accounts.  If you’ve done international banking in the post-9/11 world, you know that Know Your Customer (KYC) and Anti-Money Laundering regulations have made setting up foreign bank accounts a nightmare. Just wait until you have to ask your investors for their personal financial statements or copies of their home utility bills.

6. On-Site Requirements

Signatories on bank accounts and corporate documents must often sign in person. It’s not even necessarily a cost issue; does your CFO really have the time to get on a flight to Russia just to sign some documents and then fly home?

7. Candidate Loss

You cannot hire someone until the foreign subsidiary is fully operational.  Have a candidate that you want to hire today or a great overseas contractor itching for security?  You better hope they can wait for a while until you’re ready…

8. Ever-Changing Compliance

Keeping up with the ever-changing regulatory landscape is nearly impossible.  When you have a foreign subsidiary you must stay current on changes to national/regional/local tax laws, payroll withholdings, employment law changes, and banking regulations—just to name a few. Read more about global compliance maintenance best practices.

9. Local Directors

A foreign subsidiary often requires a local Director. Are you going to have your one sales person be the Director?  Or do you outsource to someone you’ve never even met and give them the keys to the bank account?  Remember, they are a Director of the company, so in certain countries they can actually drain your bank account and you have no legal recourse.

10. Time Vortex

No matter how much you outsource, expect executives from your legal, finance, and HR team to invest hours of time coordinating a foreign subsidiary.  Legal must review all the documents, finance must sign off on all the expenses and deal with the bank account set up, and HR must review all the employment particulars.  We estimate from our experience it takes 160 man hours within an organization to set up a foreign subsidiary. Note, you can not offload this work to your staff.

We get it: this can be a little overwhelming. That’s why Velocity Global’s International PEO (Professional Employer Organization) solution makes expanding into new global markets simpler and more cost effective than entity establishment.  With a global reach that touches over 185 countries, our global infrastructure can have you up and running in your new international market in as few as 48 hours—all without establishing a permanent presence right off the bat. Think International PEO sounds like a better solution for your global expansion needs? Let’s get you global.