Global expansion is undeniably one of the best ways for your company to grow and thrive in the business landscape of today.
And to take advantage of this growth, establishing a foreign entity might appear to be the best way to help your company grow.
Whether you are:
- Building a team overseas to diversify talent or save staffing costs
- Setting up in the home country of an industry specialist in order to bring them on board
- Testing a specific local market for a new service or pursuing long-term goals
- Moving to a remote-first culture and ready to attract new global talent
Establishing a physical presence in your new territory may feel like the answer. But it’s an answer that also introduces a host of complexities and dozens of new questions.
The first steps onto unfamiliar terrain can be precarious and when you’re going it alone, unexpected obstacles — financial, logistical and practical — have the potential to halt your progress. Here are some hard truths your company should consider before making the decision to open a physical entity.
1. Initial Costs
On average you should expect to spend between $20,000 and $150,000 creating a foreign subsidiary. And costs differ widely between countries. This has the potential to consume a massive chunk of your budget before a project has even begun.
This doesn’t even include the maintenance fees of the business, hiring costs, and more.
Are you confident that the project has the legs to justify such costs? Will your new team stay the course and validate your investment?
2. Time Costs
The reality is that establishing a foreign entity takes time. Actions that take only two weeks at home can swallow up months of your time when you add the complexities of operating in a new territory.
As a rule of thumb, the average set-up time is three months. And you’re often looking at times of up to six months or more. Consider whether the demands of your business can be put on hold for so long.
You may need to hire and expand much faster than the legal process allows.
3. Talent Costs
Important players in your leadership team will invest a significant amount of their time coordinating a foreign subsidiary.
Documents must be reviewed by legal, finance must sign off on all the expenses and the practicalities of setting up bank accounts, and HR must stay on top of the specifics of employment offers, contracts etc.
Can the drain on their valuable time be rationalized at this time? Do you have a large enough team to support this endeavor?
4. Recruiting Competitively
Until your foreign subsidiary is fully operational you cannot allow your dream team to sign on the dotted line.
In today’s challenging recruitment climate it’s a risk to expect a talented contractor or highly skilled candidates to wait around as you get up and running.
Speed to hire makes all the difference in landing top talent, fueling growth of your business, and expanding into new markets.
5. International Banking
International banking demands familiarity with Know Your Customer (KYC) and Anti-Money Laundering regulations and a foreign subsidiary will require foreign bank accounts.
Setting these up can prove a logistical and time-hungry challenge.
6. In-Person Requirements
Signatories on bank accounts and corporate documents may require in-person signatures. Beyond the cost, it’s simply not a good investment of time to send valuable company personnel across the world merely to sign documents.
7. Compliance
It can be extremely difficult to keep pace with the ever-changing regulatory landscape.
In taking on a foreign subsidiary you must commit to staying up-to-date on changes to tax laws —national, regional, and local — to payroll withholdings, employment law changes, and banking regulations in addition to observing cultural and religious holidays and practices.
And you’ll potentially be receiving this information on a translated document , and nuance may be lost.
8. Local Directors
A foreign subsidiary can require a local director. Will you outsource this position or rely on someone in-house who may not be qualified to carry out its demands?
In some countries, a director of the company will have access to your bank account. How will you ensure your financial security from afar and what recourse will you have if funds are fraudulently accessed?
9. Maintenance
Foreign subsidiaries are expensive to maintain. A single employee overseas can require an outlay of tens of thousands of dollars a year. And various ongoing fees to ensure compliance and for filings can also add up as well.
10. Change of Plans
If the project you established the subsidiary for should fall through, your strategy for global expansion changes, or the specialist you took on simply is not up to the job, you may need to wind down your foreign entity.
This has the potential to be even more time-consuming and costly than establishing it.
Should you establish a foreign entity?
This isn’t to scare you away from ever establishing a local legal entity.
And it can be an excellent solution further down the line when your company has long-term plans in the region and the business has scaled to a certain size.
Businesses with more than 35 employees in one country, for example, might find that it makes financial sense to do so.
But even then, you might not be ready or fully able to commit to the time and costs to get started. Yet, there is another and more cost-effective way to compliantly hire and expand globally.
Expand Internationally With An Employer of Record
If those hard truths make global expansion sound expensive and slightly intimidating, never fear, that is exactly why Employer of Record providers exist.
Here are the responsibilities you can expect an Employer of Record (EOR) to take on for you so that you can grow your business compliantly and look to the future with confidence:
An EOR provides you with end-to-end support from onboarding to off-boarding. This checklist will help you to identify your needs and see how the EOR’s services can meet them:
Generates compliant contracts
Every country has a specific set of rules to follow when developing employment contracts.
Your global EOR will create jurisdiction-complaint employment contracts for your peace of mind but all the important details such as pay, duration — indefinite, casual, or fixed-term — and working hours will be determined by you.
Payroll processing
The EOR processes the payroll of all your international employees. It manages deductions, expense reimbursements, garnishments, and statutory leave entitlements.
You have the reassurance that the method of payment and payment cycle will follow legal obligations, local customs, and your own requirements.
Tax registration
The EOR is registered with local tax authorities as the employer of your staff so it’s required to withhold certain taxes from employee salaries, such as income tax and payroll tax contributions.
It will also regularly submit details of those payments to authorities and follow reporting requirements so that you remain compliant.
Provides critical employee information
Global Employer of Record services support companies by managing and overseeing international employees.
You can maintain an overview of salaries and benefits and monitor statutory leave, holidays, and time off to help with staffing and budget projections.
Makes compliant and timely payments
An enduring challenge faced by employers when paying international workers is remaining compliant with that country’s taxes and mandatory deductions.
By using a global EOR you benefit from the knowledge of its compliance teams, ensuring that payments made to your international employees comply with local taxes and deductions and are made on time.
Partnering with a global EOR also removes the complexity of salaries in different currencies. You pay your EOR service in a single currency then they distribute the correct amounts in the appropriate currencies.
Terminates or renews contracts
The EOR can compliantly terminate employees on your behalf (when permitted under the law) and it can renew end-of-term contracts at your behest.
Building a team or finding individuals who are the right fit for your organization from afar — with the added complexity of cultural and language differences — doesn’t always go smoothly, making this an invaluable service.
Final Thoughts
The benefits of global hiring can be huge for your organization. Even with the challenges, it can be a smart move for your business.
And you have another option to compliantly employ in various countries, without establishing a foreign entity. RemoFirst for example, has streamlined global HR and payroll with a process that is as simple as 1-2-3.
This combined with bulletproof compliance, allows companies to expand across borders and enjoy the possibilities that an EOR can open up, with the agility that the contemporary landscape demands but without the pitfalls of escalating costs and legal risks.
When you’re ready to employ full-time employees or contractors from anywhere in the world, do so at the best pricing with RemoFirst.
