4 Things to Consider Before Setting Up a Foreign Legal Entity

February 13, 2018

Many companies are expanding globally to find new markets and increase their revenue. There are challenges that come with hiring overseas and it can be difficult to know where to start.

A commonly held belief is that the first order of business is to set up a foreign business entity. A foreign business entity is a separate legal entity and it’s necessary if you want to run payroll directly in that country.

This blog post will look at the challenges that come with setting up a legal presence in a foreign market.

4 Challenges Involved in Setting up a Foreign Legal Entity

Establishing a foreign entity is an option but it may not be the right choice for your business. A lot of time and money goes into setting up a foreign entity. Most businesses find that the rewards don’t justify the effort.

Here are four things you should consider before setting up a foreign entity:

  1. Costs involved

    Setting up a foreign entity is a costly endeavor. It’s safe to assume you will spend tens of thousands on set-up costs and it will cost even more money to maintain every year. And if you are unsuccessful in that market, it will be difficult and expensive to exit that country.
  2. Set-up time Setting up a foreign business entity is often a lengthy process involving lawyers, tax accountants, bank accounts, government red tape, and more.  It can take more than six months to set up and requires a long-term commitment and ongoing expenses for U.S. companies.And you won’t be able to hire anyone until your subsidiary is fully operational. So if you have an international candidate waiting for a contract, you will have to hope they are willing to wait until your foreign entity is established.
  3. Challenges with international bankingA foreign business entity will require a foreign bank account. This can be difficult to set up due to Know Your Customer and Anti-Money Laundering regulations. For instance, corporate documents and bank accounts often need to be signed in person. 
  4. Keeping up with compliance When you set up a foreign entity, you are responsible for staying current on any regulatory changes. This includes tax laws, changes in employment law, banking regulations, and more.

An Alternative Solution

There are many ways to do business in other countries and some come with more risk than others. So before you set up shop in another country, you will need to consider your options first.

Fortunately, there are alternatives to setting up a foreign entity. This is one of the many international employment challenges that Clearfront HR can guide you through.

Our Employer of Record service eliminates the need for you to set up foreign business entities. We handle all of the complexities involved in international HR so you can focus on the core aspects of running your business.

If you were considering setting up a foreign subsidiary, know that there may be an easier path. Contact us to learn more about how it works.