Global expansion is a rite of passage for most businesses. International expansion brings forth novel avenues for growth, such as a new customer base, increased recognition, and more revenue. An effective way to broaden your base is through a foreign subsidiary. Let’s learn more about foreign subsidiary companies and how you can set one up.
What Are Foreign Subsidiaries?
Foreign subsidiary companies are separate legal entities operating in another country. A parent company wholly or partially owns it, but it conducts its business according to the laws of the host country. Foreign subsidiaries are a preferred means of expanding business globally and acquiring a new customer base. Designed to be more culturally integrated, they are often seen as local businesses, allowing them to build strong relationships with customers and partners.
Types of Foreign Subsidiary Companies
The ownership structure between the parent company and the subsidiary defines the extent of the stake in the business. Based on this, we can broadly categorize foreign subsidiaries into three types:
Wholly Owned Subsidiary
The parent company holds a 100% stake in this type of foreign subsidiary, and it exercises complete control over the management and decision-making in the business.
Partially Owned Subsidiary
The parent company’s stake in such a company is typically more than 50% but less than 100%. It is formed in conjunction with a local investor or business to gain access to the market easily.
Joint Venture Subsidiary
Here, two or more companies come together to form a subsidiary and conduct business in a foreign market. This type of business setup combines the expertise and resources of all the companies involved, which in turn provides easy access to the market and helps combat the associated hurdles.
Why Should You Consider a Foreign Subsidiary?
Global expansion is multi-faceted, and there are various factors to consider. A foreign subsidiary combines the broader outlook of the parent company with a more targeted approach in sync with the local market. Setting one up is advantageous in more than one way. Take a look:
Sometimes, a cultural alignment is necessary for businesses to expand in the target market. Foreign subsidiary companies help translate the global presence at a local level by ensuring the products and services are associated with the local needs and requirements. A successful adaptation to the regional and cultural requirements bolsters brand awareness and recognition.
There is a lower risk for parent companies in extending the business through a foreign subsidiary. The parent company’s assets are not liable to be sold off in the event of debts or other claims.
Foreign subsidiary companies work cohesively at a local level, tailoring their approach to meet the demands of the local market. They employ locals/residents and directly engage with the customers, ensuring informed decisions.
Diversified Customer Group
A foreign subsidiary company is a viable option for a diverse customer base. They adapt to the local culture and meet demand with tailored products or services, ensuring easy penetration into the market.
As a separate legal entity, a foreign subsidiary company can enter into mergers and acquisitions with other companies. Such moves bypass specific laws or formalities that restrict the registration of a company.
Go through our latest content on Mergers and Acquisitions Services in Singapore, to get a clear picture on the benefits and other documents required for the procedure.
Why Is It Better than a Foreign Branch?
Though the foreign branch offers simplicity and ease of setup, here are some critical reasons why a foreign subsidiary is a better option than a foreign branch:
A significant difference between the two is that foreign subsidiary companies are separate legal entities. Unlike a foreign branch, they are deemed separate from the parent company and have distinct assets and liabilities.
A parent company exercises complete control over its foreign branch and is responsible for every decision. On the other hand, the percentage of stake in the capital defines the ownership of a foreign subsidiary. Thus, the parent company can wholly or partly control it.
A foreign subsidiary has limited liability, meaning it can only use its assets to settle debt or other claims. On the other hand, in a foreign branch’s case, the parent company’s liability is unlimited and extends to its assets.
The tax makeup of both the foreign branch and the foreign subsidiary is different. Since a foreign subsidiary company is a separate legal entity, it pays taxes on its overall income in the foreign country. On the other hand, a foreign branch’s profit is a part of the parent company’s income, which is taxed accordingly.
How to Establish a Subsidiary Company?
Setting up a subsidiary is complex and often requires guidance from consultants with local knowledge. Here’s a quick overview of the process of how you can set up a subsidiary:
Choose a Business Expert
The first step in setting up a foreign subsidiary company is choosing a business expert who can guide you through the legal framework. Business Setup Worldwide’s extensive expertise in various jurisdictions can help you set up a company with ease.
Select a Jurisdiction
The choice of jurisdiction depends on your target customer base and must closely align with your business goals. You should also consider the country’s legal and regulatory framework and ensure it is conducive to business growth.
Choose a Legal Structure
There are three categories to choose from: wholly owned, partially owned, or joint venture with a local partner. The choice of structure is closely dependent on the market dynamics and difficulty of market entry.
Set up a Company
Once you have decided on the jurisdiction and structure, you can proceed with the legal formalities, such as filling out the form, submitting documents, and ascertaining capital structure, among other tasks.
Open a Bank Account
After establishing a subsidiary, you must open an international bank account to get started with your business activities and enjoy seamless financial transactions in any currency.
Selecting the right strategy for global expansion is imperative for business growth. A foreign subsidiary company is an ideal option with a distinct setup and operational freedom. However, setting one up comes with lots of legal formalities. Hiring a business expert, such as Business Setup Worldwide, ensures complete compliance and flawless execution of the setup. Our team of experts has years of experience in company formation all over the world. Contact us now to get started!
