Subsidiary vs. Branch: What is the Right Move for You?

So, you want to expand your business into the global marketplace but you’re not sure whether you should pursue subsidiaries, branches, or partner with an EOR like Via. Regardless, you’re probably asking, What’s the difference between a subsidiary vs. branch, anyway?

One thing is for certain: Deciding to make the jump to open an entity in a foreign country opens up a lot of great opportunities like more trade options, a larger marketplace, and access to a greater talent pool. However, the process can be a bit daunting, and you will have to consider what works best for your overall business plans. 

As companies expand abroad, they usually choose between opening a branch or a subsidiary, though companies that are simply looking to hire talent abroad can partner with an EOR like via. Subsidiaries and branches both have their pros and cons, and you should carefully consider which structure fits your company's needs best before making the decision. 

In this post, we will give you a breakdown of the pros and cons of a branch vs. subsidiary and the general requirements for both. 

What is the difference between a branch and a subsidiary? 

An extension of your main office or business, branch offices are representative offices. They have a branch manager reports back to the head office. The parent company has 100% control over the branch office. It does not operate as a separate legal entity like a subsidiary. This means that any liabilities or compliance problems that arise at the branch office fall under the purview of the parent company. Branch offices normally conduct business on behalf of a parent or holding company. 

A subsidiary, on the other hand, is a completely new business in a foreign country and is considered a separate legal entity. The subsidiary's holding company or parent company owns at least 50% or more in stakes. Any liability falls on the subsidiary instead of the parent company, as the parent company is considered a separate entity. 

What are the pros of opening a branch office? 

To open a branch office, the parent company doesn’t have to go to as extreme of lengths to establish a physical presence, which is essential when opening a subsidiary. A branch office makes it easier to go into local markets and reach the needs of a wider customer base in a new country. The new office's day-to-day operations are the same or part of the parent company's head or main office.

Greater level of control

One of the most common differences between a branch office and a subsidiary is that the branch office is held at 100% of the stakes by the holding or parent company.

The parent company usually has at least a 50% stake in the subsidiary. If a parent company owns 100% of the subsidiary, it is referred to as a wholly-owned company. Both a branch and a subsidiary need to have a board of directors. However, the requirements for each will vary from place to place. 

Cheaper to open

Opening a branch office normally doesn’t have any initial capital investment, so it can be more affordable than a subsidiary. 

Recognized globally

Branch offices are recognized as extensions of the parent company, which earns them immediate credibility and brand awareness.

Easy-to-navigate tax benefits

Tax-wise, opening branches is a much easier process to navigate. As branches operate as an extension of the main office, they normally don’t need to file a separate tax return.

What are the cons of a branch office? 

Branch offices, however, have their limits, too.

Business opportunities 

The parent company holds 100% of the stakes in the branch office, so they aren’t able to tailor their business to the local market as effectively as a subsidiary could. The parent company is also responsible for all liabilities, tax problems, and compliance issues.

Visa issues

Branch offices aren’t normally allowed to sponsor visas or re-locate employees from another country. Most importantly, branch offices can’t hire employees within the country where it’s located, as they aren’t considered a separate legal entity. 

Local trust issues

Foreign branches do not have the same authority as subsidiaries or entities, which can lead to trust issues in the new market. If any debts were to occur, then the branch office itself wouldn’t be responsible for paying them, as they aren’t considered a separate entity. 

What are the pros of a subsidiary company? 

If you have the time and resources to invest in a subsidiary, then pursuing this route can be a good option. Many companies choose to first explore the new local market through a branch office or an EOR service, and if there are positive results with the branch and EOR, they will choose to then open a subsidiary. 

Local opportunities

Opening a subsidiary will give you a greater market presence and make your company seem more trustworthy to customers and other local businesses.

Trade opportunities 

 Being a local operation can also give companies access to more trade opportunities.

Independence from parent company

Opening a subsidiary gives your business independence from the parent company. You will be able to tailor your business practices to the niche marketplace in the country where you plan to expand. You will also be able to hire management and employees who have in-depth knowledge about the culture in the country you’re expanding to. 

What are the cons of setting up a subsidiary company? 

Although opening a subsidiary gives you a lot more leeway when it comes to how your entity will operate in a new place, you should still consider what could go wrong.

Lack of control

Once you open a subsidiary, you will have a lot less administrative control over how the subsidiary operates. The employees of the subsidiary aren’t necessarily governed by the parent company, and there can be a lot of room for disconnect between the two. 

Cultural and regulatory changes

When opening a subsidiary, there may be problems with adjusting to cultural, political, and economic differences. Think about how the French subsidiary in the popular TV show Emily in Paris turned into a disaster for the Chicago office!

Political, legal, or social changes that occur within a country can make navigating a new market challenging. The result is often a loss of revenue. 

Establishment and exit costs

Opening a subsidiary requires a lot more up-front investment capital and can take more time than establishing a branch office. You should have a legal team that is able to guide you through the entire setup process. If you choose to close a subsidiary, it takes a lot longer and can be expensive, especially in comparison to a branch, which has a much simpler process for closing down.

What other options do you have besides opening a subsidiary or a branch? 

Instead of opening a legal entity in another country during your expansion, you have the option of partnering with a PEO or EOR service to help you with processes like compliance, hiring, and payroll. Both services have their advantages and disadvantages. 

Opening an entity and partnering with a PEO service

For companies that want to build a large team in another country and have their own entities, using a PEO solution service is one option. 

PEO companies act as co-employers and manage the local HR process. However, they do not accept nearly as much legal responsibility for the entity in the country. If any compliance issues arise, the PEO service will likely pass these problems over to the parent company. 

Partnering with an EOR service

When using an EOR service like Via, you do not need to open a bank account or take legal responsibility for complying with local labor laws. An EOR takes care of that paperwork for you, including navigating local laws and paying employees in the country's official currency.

If you’re looking to hire 1 employee or a whole team in another country, using an EOR service expedites the process. Global EOR services help major corporations looking to scale up operations abroad, as well as scaling startups, SMBs, and other entrepreneur-led businesses.

Why companies choose Via

Many companies want to expand across borders, but do not have the in-depth knowledge of beginning the process compliantly and how to hire talent compliantly. Via makes hiring employees and building your global team seamless. Via helps you manage local HR processes for direct employment such as work visas & permits, benefits, payroll, background checks, and more. Our team of local labor lawyers and on-the-ground experts ensure that your company remains compliant while expanding abroad. As your global employer-of-record/entity, Via assumes responsibility for employment liability, so that you can focus on what matters: recruiting and managing your team. 

With Via’s transparent pricing, you can pay full-time employees or contractors with no hidden set-up fees, no foreign exchange or transaction fees, and no minimums–start with 1 employee and scale up at your own pace.

FAQs

What is the difference between a subsidiary and a branch? 

The difference between a subsidiary and a branch is that a subsidiary is considered a separate legal entity from the parent company, whereas a branch is an extension of the existing company. 

Which is better: a subsidiary or a branch? 

Both a subsidiary and a branch have their advantages and disadvantages. A subsidiary has more flexibility regarding operations while a branch is completely controlled by the main company. A subsidiary, however, takes a lot more time and effort to establish, especially compared to a branch. 

Is a branch considered a subsidiary? 

No, a branch and a subsidiary are two different types of entities. A branch acts as an extension of a parent company and thus shares capital with the parent organization, while a subsidiary acts as a separate legal entity. 

What is the difference between a foreign branch and a subsidiary? 

A foreign branch is another location of your company in another country that operates under the same name. A subsidiary is a separate entity that can tailor its business practices to the culture of the country you set it up in. Some entities change their names. A popular example of a subsidiary is "Savoir" from Emily in Paris.