Alternatives to creating a foreign subsidiary company Alternatives to creating a foreign subsidiary company

Alternatives to creating a foreign subsidiary company
11 Jan 2018

By Ben Wright CEO, Velocity Global

Traditionally in order for a company to have a human presence in a foreign country, they have to create a foreign corporate entity also known as a foreign subsidiary. These companies invest the large amounts of time, resources and capital to establish then maintain a foreign subsidiary in their target country so they can do business there.

It might take them three to six months to go through this process before they can even hire their first employee in the target country.

This strategy is fine if you are 100 per cent sure that your international strategy will always include the target country and you have those resources to burn. Also you don’t have to reinvent the wheel - there are great companies that can help you create a foreign subsidiary. These consultancies can even help with the maintenance, compliance and payroll.

Here is some food for thought

• What if you are a smaller company looking to ‘test’ a foreign country as an option?
• What if you want to see if the assumptions of your international business plan are correct before you invest heavily in foreign subsidiary creation and management?
• How valuable would it be to get a trusted human presence in the market who can report back to confirm the opportunity?
• What if there is a possibility that this opportunity may dry up in a year or two, and now you have to tear down a foreign company?

If these questions ring true with the questions and fears that you have, there are alternatives to the ‘allin’ approach.

One is very lightweight, but very risky: the other is panning out to be the best of both worlds for many companies who are looking to take a lean approach to their international expansion initiatives.

Two alternatives to subsidiary company establishment

Foreign independent contractors
A foreign independent contractor is someone who resides and does business in another country, but you contract them using a contractor agreement written for your domestic place of business. At face value this seems like the easiest way to get someone working for you in a country, but there are many risks that tend to hide in this relationship and they almost always outweigh the initial easiness.

Many times companies treat these contractors like they are employees in every way except contractually and in terms of labour law. This is called ‘contractor misclassification’ and it raises many red flags for the labour regulatory bodies in 99 per cent of countries out there. We witnessed a company who was not working with us spend almost $375,000 USD and 11 months working out one of these disputes. They had to go through this process though in order to keep the right to do business in their target country.

Some other compliance traps that international employers don’t think of when using foreign independent contractors (to name a few):

• IP protection is very difficult, because in many countries it is illegal to have confidentiality agreements or non-competes both during and after the contract is complete

• If the contractor realises that they are a misclassified employee they can report you to the labour board and demand termination pay, paid holidays etc.

• Your ability to enforce anything contractually is minimal considering you do not have an actual company presence in that country.

International PEO or FSaaS
International PEO and Foreign Subsidiary as a Service (FSaaS) are ‘employer of record’ solutions, which means a third party company hires your employees on your behalf in the target country and HR functions are passed through. Although this solution does not allow you to acquire large volumes of physical assets in country, it does solve the liability risk and employment based risk. You can comply with local labour law and have enforceability, meaning if something does happen you actually have the right to go to court and defend yourself.

Many companies consider this option because of the following factors:

• Speed: You can hire your candidate in whatever country you want in 48-72 hours, not three to six months
• Proactive compliance: The compliance methodology of FSaaS and international PEO is proactive, meaning your provider warns you of any compliance risks while you set up and while you operate in country
• Flexibility: There are no commitments (other than the statutory termination period of the country)
• Set up and teardown costs: Subsidiary companies can cost anywhere from $20-50,000 USD to set up and sometimes three times that to teardown.

Typically, international PEO and FSaaS have a small set up fee and then are billed as a percentage on top of employee compensation with no hidden costs

We feel that International PEO and FSaaS truly are ‘global expansion 2.0’ especially for smaller to midsize companies who want to test a market first.

 

Velocity Global is a global employment services company that is reinventing the way its clients do business internationally with its Foreign Subsidiary as a Service (FSaaS) solution. With capabilities across 170 countries, Velocity Global is a leader in agile global expansion.

By Ben Wright CEO, Velocity Global

Traditionally in order for a company to have a human presence in a foreign country, they have to create a foreign corporate entity also known as a foreign subsidiary. These companies invest the large amounts of time, resources and capital to establish then maintain a foreign subsidiary in their target country so they can do business there.

It might take them three to six months to go through this process before they can even hire their first employee in the target country.

This strategy is fine if you are 100 per cent sure that your international strategy will always include the target country and you have those resources to burn. Also you don’t have to reinvent the wheel - there are great companies that can help you create a foreign subsidiary. These consultancies can even help with the maintenance, compliance and payroll.

Here is some food for thought

• What if you are a smaller company looking to ‘test’ a foreign country as an option?
• What if you want to see if the assumptions of your international business plan are correct before you invest heavily in foreign subsidiary creation and management?
• How valuable would it be to get a trusted human presence in the market who can report back to confirm the opportunity?
• What if there is a possibility that this opportunity may dry up in a year or two, and now you have to tear down a foreign company?

If these questions ring true with the questions and fears that you have, there are alternatives to the ‘allin’ approach.

One is very lightweight, but very risky: the other is panning out to be the best of both worlds for many companies who are looking to take a lean approach to their international expansion initiatives.

Two alternatives to subsidiary company establishment

Foreign independent contractors
A foreign independent contractor is someone who resides and does business in another country, but you contract them using a contractor agreement written for your domestic place of business. At face value this seems like the easiest way to get someone working for you in a country, but there are many risks that tend to hide in this relationship and they almost always outweigh the initial easiness.

Many times companies treat these contractors like they are employees in every way except contractually and in terms of labour law. This is called ‘contractor misclassification’ and it raises many red flags for the labour regulatory bodies in 99 per cent of countries out there. We witnessed a company who was not working with us spend almost $375,000 USD and 11 months working out one of these disputes. They had to go through this process though in order to keep the right to do business in their target country.

Some other compliance traps that international employers don’t think of when using foreign independent contractors (to name a few):

• IP protection is very difficult, because in many countries it is illegal to have confidentiality agreements or non-competes both during and after the contract is complete

• If the contractor realises that they are a misclassified employee they can report you to the labour board and demand termination pay, paid holidays etc.

• Your ability to enforce anything contractually is minimal considering you do not have an actual company presence in that country.

International PEO or FSaaS
International PEO and Foreign Subsidiary as a Service (FSaaS) are ‘employer of record’ solutions, which means a third party company hires your employees on your behalf in the target country and HR functions are passed through. Although this solution does not allow you to acquire large volumes of physical assets in country, it does solve the liability risk and employment based risk. You can comply with local labour law and have enforceability, meaning if something does happen you actually have the right to go to court and defend yourself.

Many companies consider this option because of the following factors:

• Speed: You can hire your candidate in whatever country you want in 48-72 hours, not three to six months
• Proactive compliance: The compliance methodology of FSaaS and international PEO is proactive, meaning your provider warns you of any compliance risks while you set up and while you operate in country
• Flexibility: There are no commitments (other than the statutory termination period of the country)
• Set up and teardown costs: Subsidiary companies can cost anywhere from $20-50,000 USD to set up and sometimes three times that to teardown.

Typically, international PEO and FSaaS have a small set up fee and then are billed as a percentage on top of employee compensation with no hidden costs

We feel that International PEO and FSaaS truly are ‘global expansion 2.0’ especially for smaller to midsize companies who want to test a market first.

 

Velocity Global is a global employment services company that is reinventing the way its clients do business internationally with its Foreign Subsidiary as a Service (FSaaS) solution. With capabilities across 170 countries, Velocity Global is a leader in agile global expansion.

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