Global expansion remains a core theme for businesses of all sizes, as it opens up various avenues and opportunities for business growth. At a certain point, all businesses, irrespective of industry and business domain, need to explore new market opportunities. Also, expanding into global markets can provide a haven for small businesses facing intense competition from large companies.
However, navigating global expansion is usually associated with unfolding challenges and can be highly difficult, especially for small businesses. Even large companies often face different types of challenges when expanding globally. To effectively navigate market expansion internationally, you’ve got two primary options, which shine prominently in cross-border business expansion—employer of record (EOR) services and subsidiary company.
Through this blog, you’ll learn the key advantages of both options and understand which option will be more suitable depending on your business needs and size. Also, you’ll know the key beneficiaries of both business expansion options. Before we dive into further details, let’s understand the meaning and difference between EOR services and subsidiary companies.
What is an employer of record (EOR)?
An employer of record (EOR) is a legal guardian of employees who work for a company with different legal compliance systems. It means that an EOR takes care of the legal responsibilities of professionals who work for a company based in another country. For the record, EORs are the legal employers of your overseas workforce and handle administrative support services for your employees, such as payroll, taxes, benefits, and compliance. With EOR assistance, you can hire full-time employees and expedite your global expansion without investing in a new entity in the target country.
In short, EOR services offer major support systems that facilitate seamless business expansion in another country without forming a subsidiary company.
What is a subsidiary company?
A subsidiary company is an entity partially or fully owned by a larger organization, also known as a parent or holding company. To be eligible for a subsidiary, the parent company must own more than 50% of the subsidiary’s stock. In another case, the parent company can own 100% of the foreign subsidiary company’s shares, which makes it a “fully owned subsidiary.”
In a foreign subsidiary, the subsidiary operates outside the home country of its parent company. As a result, subsidiaries have separate legal entities, facing different laws and regulations from the parent company. Thus, foreign subsidiaries operate independently even though the parent company has the upper hand in the selection of its board of directors.
By setting up a foreign subsidiary, you can establish a strong presence in the local market of the target country. You can directly hire full-time employees and navigate global expansion under your direct control.
When is EOR a better choice over a subsidiary?
- Quick entry into new markets: Using EOR services is the ideal option when overseas businesses want a hassle-free and quick path to enter new markets. By leveraging their well-established infrastructure and networks, EORs assist a global company in establishing its presence in a foreign country with zero delays and minimal costs. By opting for an EOR partner, you can eliminate bureaucratic delays and red tape problems associated with setting up a subsidiary company.
For instance, it takes 2-3 months to complete subsidiary incorporation in India. But, with an EOR partner, you can easily open a branch office in a week if you’ve already decided on the particular city. Also, you can kickstart your business operations in a day or two if you’ve identified resources.
- Low capital investment: When businesses don’t want to make a huge capital investment to establish their market presence, EORs offer the best solution. By partnering with an EOR, you can expand your international business at a low cost, thereby saving you from the substantial upfront investment required for establishing a subsidiary.
For example, setting up a subsidiary company in India includes substantial registration costs and other notable fees. But EORs charge straight and fixed costs, which are calculated per employee. In India, EOR service charges range from USD 149 to 499 per head monthly. Some EORs charge their service fees from 8 to 18% of the employee’s salary per month. In general, subsidiary incorporation can be four times more expensive than using EOR services. Learn more about the cost of building remote teams.
- Testing the waters: Not every business succeeds in global expansion. It’s crucial for every business, especially small businesses, to evaluate the target market thoroughly before making a long-term commitment. When you want to test the waters before making long-term financial commitments, using EOR solutions is the ideal option. With EOR assistance, you can constantly assess the market dynamics, supply and demand matrix, and regulatory compliance status.
- Easy business exit: Working with EOR services is the ideal option when you look for a business expansion model that allows an easy exit of your business. Global businesses often shut down their existing operations for various reasons, including the lack of market suitability or work misalignment of overseas resources. You can easily exit the target market without financial burdens or regulatory complications when working with EORs.
Closure of any business (subsidiary) is a daunting and time-intensive process due to multiple binding regulations. For example, it normally takes 1-2 years for final account settlements and acquiring a no-objection certificate in the case of a business exit in India.
- Handing over administrative burdens: When you want to outsource administrative services for your remote professionals, opting for EOR services is a better option. In many cases, small businesses consider handing over the responsibilities of managing their employees’ daily human resources (HR) activities to a third-party expert. By outsourcing HR functions, businesses gain more time and space to focus on their core business activities.
Handling compliance challenges remains a major risk for businesses when they have operations beyond borders. EORs are the experts who handle various administrative activities that comply with the existing legal and regulatory framework of a target country.
When is a subsidiary a better choice over EOR?
- Long-term commitment: Setting up a legal entity in a foreign market is a better option when you decide on long-term commitments. The commitment comes after you’ve already done your cost-benefit analysis and calculated the return on investment. Businesses usually decide their long-term commitment when they have clear and comprehensive knowledge of the ins and outs of the target market. To form a subsidiary company, you need to decide your approach and strategies to ensure your long-term commitment is successful.
- Overseas credibility and brand awareness: Establishing a subsidiary is more suitable when you want to expand your business credibility and brand awareness in the local market. A subsidiary signifies a lasting presence in the local market and enhances the awareness of your company’s brand. Having a local branch of a company is not enough to gain the trust of local customers and business partners. With a local presence through subsidiaries, you can promote your brand using local support and networks. Also, you can directly access a talent pool, attract and hire the best talent, and retain them easily. Fostering a long-term connection with local partners and customers plays a vital role in global expansion.
- Strategic tax planning and tax benefits: Opting for a subsidiary is an ideal solution when you look for strategic tax planning and tax benefits. As subsidiaries are separate legal entities, they operate independently and enjoy flexibility in their tax planning and optimization. They can frame the policy structure and implement it to align with local tax incentives, which potentially reduces the overall tax burden of their parent companies. Being a subsidiary, you can set specific operational standards without external interference and can be easily ingrained into local customization for several tax benefits.
- Sales of products or services: Subsidiary incorporation in a foreign country is a better decision when you want to sell your products or services in the target local market. You need to have a legal entity in the country to directly sell your products to customers. To reach more new customers for your products, you need to establish a strong local market presence and network.
Who will benefit from using EOR services for global expansion?
- Startups and small businesses: EOR services offer all-in-one solutions for startups and small businesses seeking global expansion at a minimal cost. Using the services, small businesses can safely explore foreign markets without the financial burden and compliance risks. Learn more about the employer of record benefits for small businesses.
- Short-term projects: EOR solutions are more suitable for businesses focusing on short-term projects or hiring professionals for short-term contracts. In the EOR model, businesses can quickly hire overseas professionals and retract them with zero complications when the project concludes.
- Outsourcing administrative functions: Using EOR services is an ideal solution for companies seeking dedicated HR and legal experts to help manage their overseas resources. Businesses can simply outsource the administrative functions of their overseas workforce to an EOR partner without the need for in-house expertise.
- No sales, only support center: Opting for EOR services is an ideal option for businesses that don’t have sales activity when expanding their overseas workforce. It’s the best solution for companies looking for a support center or unit in a particular country. Not only are EORs cost-effective solutions, but they also offer expertise for the smooth functioning of support centers.
Which businesses are the key beneficiaries of a subsidiary company?
- Established enterprises: Establishing a subsidiary company is the ideal option for large businesses or established enterprises with strong financial conditions. Acquiring a company in a foreign country makes more sense when businesses see their long-term growth and competitive advantage in investing in the target country.
- Industry-specific businesses: For businesses seeking expansion in a specific country that offers easy access and advantages for the particular industry, forming a subsidiary is more suitable than opting for EOR services. Also, some industries, especially in finance and pharmaceuticals, often attract specific regulatory requirements; choosing subsidiary incorporation can be a better choice to comply with the strict regulatory requirements.
- Global expansion as a core strategy: Setting up a subsidiary company is the best option for businesses seeking global expansion as a core strategy for their growth opportunities. Marking a global footprint and reaching new customers can be effectively prepared with subsidiary formation.
In conclusion, the choice between EOR services and subsidiary company formation will differ from one business to another. Choosing the best option depends upon various factors, including the business size, financial conditions, business needs, and goals for international business expansion.
Typically, large companies prefer to opt for subsidiary incorporation, considering the advantages of better control of their resources, long-term market opportunities, and competitive advantages in the industry. However, setting up a foreign subsidiary can be a bit challenging, even for large companies, if they don’t have a clear comprehension of the unique work culture, employee work expectations, and local culture.
For effective operation of the subsidiary company, large companies can use the benefits of EOR services. With an EOR partner as an interim caretaker, large companies can fully prepare for the smooth functioning of their subsidiary companies. For small businesses, opting for EOR solutions remains the best option, as the businesses can explore a new market with reduced cost, minimal risks, and an easy process for market exit.