For those of you interested in setting up a business overseas, you’ve come to the right place. Our team helps businesses establish a legal and compliant foreign presence in over 185 countries.
Many of our clients come to us with questions about how to manage all of the regulations in their target market. As a result, we put together this post to help business people, like you, understand your options for setting up a business overseas. Trust us – there’s more to international company creation than establishing a permanent branch or subsidiary.
Options for Setting up a Business Overseas
Now, I know we said that there are other options outside of a permanent subsidiary for setting up a business overseas, but that’s still a viable method for many businesses. As a result, I’ll start by explaining how a foreign subsidiary works and why you may want to avoid it during international startup.
Permanent Foreign Subsidiary
If you’re operating a larger company with ample capital available for international investment, a permanent foreign subsidiary may be your best bet. For small to midsize firms exploring international growth, we suggest a leaner method and will explain those soon.
A permanent foreign subsidiary, or branch, sets your company up for a long-term commitment in your new country. Once approved, a foreign subsidiary gives companies a legal presence and allows them to hire full-time employees. Firms with a foreign subsidiary need to manage compliance, labor laws, and tax requirements, which is a big responsibility and often requires a full-time commitment.
While the benefits of having a fully operational entity are vast, the responsibility comes with many risks and downfalls. First and foremost, a foreign subsidiary costs companies an average of $20K and takes roughly four months to complete.
In addition to startup costs, maintenance fees are around $40K per year – per employee. And what if your global strategy doesn’t work out as planned? When a company needs to pack up and leave, plan to take both the cost and startup time and multiply each by a factor of three.
Other risks associated with a foreign subsidiary include:
- Unreliable Banking in Foreign Markets – Foreign subsidiaries require foreign bank accounts. International banking is difficult to navigate in many markets and may cause extra delays with setup time.
- On-Site Requirements – Forget scanning and signing documents via the web. In many countries, like Russia for example, foreign subsidiaries require on-site visits for meetings and document signings. This can lead to unnecessary costs.
- Impatient Candidates – If you’re eager to hire employees overseas, you may lose interest if your subsidiary takes longer than expected to set up. Don’t start recruiting until you have confirmation of your entity approval.
- Trusted Local Directors – A typical foreign subsidiary requires a local director. If you’re new to a market, you may not have a trusted partner from the onset. If that’s the case, you’ll need to start thinking about who to trust the keys to your bank account to.
Avoid Full-Time Employees with Independent Contractors
Now that you’ve learned about the risks of a foreign subsidiary, you may want other options for setting up a business overseas. We get it. Making a large commitment in a new country is a big decision.
Some companies avoid hiring full-time employees, so bypassing the entity creation, by hiring independent contractors in their foreign market. On the surface, this may sound like a great idea, but it’s very risky.
The primary risk associated with contractors is the lack of safety around your employment agreement. First, you cannot use your domestic agreement to hire a contractor overseas.
If anything goes wrong with the arrangement – you’ll be expected to prove that your company has a legal presence in-country and you’ll need to show up to court.
A conflict may arise if the contractor believes they were working more as an employee than as an independent worker. Typically, in this scenario, international labor courts will side with the contractor.
Despite the risks, contractors can be extremely beneficial for your company. For example, the overall payroll savings can be around 20% when using contractors for setting up a business overseas. Companies save because they avoid paying into entitlements such as social security, health insurance, and pensions.
If you decide to work with overseas contractors, check your compliance by working directly with a global consultant.
Setting up a Business Overseas with International PEO
Companies that want a compliant presence overseas without a full commitment will find solace in International PEO (Professional Employer Organization).
An International PEO is an employer of record (EOR) service that gives companies quick access to full-time talent in their target countries. Best of all – it removes the need for establishing a foreign subsidiary by outsourcing employment responsibilities to an experienced firm, so your company can rest assured knowing that you are operating effectively and compliantly.
It also removes the risks associated with independent contractor hiring. As a result, we highly recommend using International PEO if you want to work with contractors. To recap – if a contractor is deemed a permanent employee by local governments, the employer is responsible for all benefits, back taxes, and insurance requirements. The EOR manages the working relationship to save you from those expensive risks.
In general, an International PEO is fast, cost-effective, flexible, and built around your company’s specific needs. If you’re hiring your own international employees, this option has the lowest risks.
Give us a call to learn more about the benefits International PEO.