An important issue for any business expanding into a new location (whether nationally or internationally) is to work out the correct structure for its business operations in a new location. And the key question here is, should you open a branch or a subsidiary? Here we explain the difference between the two, and look at the pros and cons of each option.
1. A branch or branch office is a regional component of a broader company and can be contrasted with the main (or ‘head’) office.
2. A subsidiary is a company that is majority-owned by another company (the latter often known as a ‘parent’ company).
3. There are pros and cons to establishing a branch office, or a subsidiary, as part of an international expansion. Generally speaking, a branch office can be a cheaper and faster option. However, it comes with substantial compliance risks for the company as a whole.
4. Any business considering international expansion should consider all the possible options for getting established overseas. Beside branches and subsidiaries, this means considering affiliates, mergers and acquisitions, representative offices and global PEOs.
What is a Branch or Branch Office?
At a certain point, every growing business will need to expand outside of its main office. It is at this point that ‘branches’ of the company are usually created.
In many cases, the branch office will carry out exactly the same activities as the main office. It is headed by a ‘branch manager’ (or in some cases a ‘country manager‘) who reports directly to head office.
Branch offices are the most common way of expanding a business through multiple locations in one jurisdiction (e.g., the bank HSBC has nearly 600 branches throughout the UK serving individual population centres).
A branch has no distinct ‘legal personality’ from the head office. They are both components of the one broader company. This means that the branch manager is directly subordinate to head office, all transactions are carried out in the name of the broader company, and the company as a whole is liable for any actions of the branch.
A branch office can be distinguished from a ‘Representative Office’ or RO, which only carries out very limited activities on behalf of the company (i.e., not core business).
What is a Subsidiary?
A subsidiary is a company where the majority of voting shares or stock in that company are owned by another company (the latter company being called the ‘parent company’).
In a wholly-owned subsidiary, the parent company will own 100 percent of the voting shares in the subsidiary.
A subsidiary can be contrasted with an affiliate, where less than 50 percent of the company is owned by another company.
Setting up a foreign subsidiary is a common vehicle for international expansion (see, for example, the Chinese model of a foreign-invested enterprise or ‘FIE). They may be set up from scratch in a new location, or be created as the result of a merger or acquisition.
Read more about the process for setting up a foreign subsidiary at Setting Up a Foreign Subsidiary: The Main Advantages and Disadvantages.
Unlike a branch, a subsidiary has an entirely separate legal personality from the parent company. This means it can enter into contracts in its own name and that it has distinct tax liability from the parent company. It also means that the parent is not automatically liable for activities carried out by the subsidiary.
Below we look at the pros and cons of choosing a branch or a subsidiary.
What are the Pros and Cons of Setting Up a Branch Office?
The advantages of setting up a branch office include:
The disadvantages of setting up a branch office include:
What Are the Advantages and Disavantages of a Subsidiary?
It is perhaps unsurprising that the advantages of setting up a subsidiary correlates closely with the disadvantages of setting up a branch. These advantages include:
The disadvantages of a subsidiary include:
What Is the Best Option Overall?
There is no one expansion solution that is right in every case. For a more permanent presence, the compliance, certainty, and credibility of a subsidiary can make sense. Where the expansion is more tentative or temporary, opening a branch office may be adequate.
It is also worth considering other options that might be available besides a branch office or a subsidiary. Consider for example:
Branch versus Subsidiary in Global Expansion
The relative merits of setting up a branch versus a subsidiary company, differ substantially depending on the business in question, and the country of expansion. This means it is essential to engage an international expansion partner to explain which option might be best for your company.
New Horizons Global Partners provides subsidiary incorporation, global PEO and international strategy advice for all types of global expansion. Contact our specialists to find out which option is right for your business.