In the era of global hiring, there are many ways to expand your startup to new countries, states, and provinces, including hiring full-time employees through an employer of record (EOR) or working with foreign independent contractors.
However, for some companies, particularly those that plan to hire many employees in a particular location, opening their own local entity can seem like the most commonsensical route to ensure you benefit from local protections, avoid permanent establishment risk, and protect intellectual property.
This article goes over the process of registering a foreign entity, the pros and cons, and why using an EOR provider like Deel could still be the superior option.
How to register a foreign entity?
The foreign entity (or foreign subsidiary) registration process differs between countries and jurisdictions. To register compliantly, you should follow proper protocol and provide complete documentation as required by the jurisdiction in which you are registering.
Generally, you can expect the following steps to register a foreign entity in most jurisdictions while preparing your application.
Step one: Check eligibility
Depending on your chosen location, there will be different conditions your business must meet to be eligible to register a foreign corporation. These conditions can include:
- Having a local resident submit an incorporation request on your behalf
Having the right legal structure (limited liability company (LLC), S Corporation, or non-profit corporation, for example) - Ensuring the business activities are legally permitted
- Obtaining the necessary licenses to do business in that country
- Meeting minimum capital requirements
- Having a “cleared” company name or name reservation certificate
- Establishing a legal mailing address for the company
- Securing a certificate of existence or certificate of good standing
- Appointing a registered agent service
Step two: Prepare your documentation
- Memorandum and Articles of Association
- Personal details of the shareholders, directors, and registered agents
- Resolutions of appointment of directors and other important officeholders
- Passport copies and address proofs of all directors and shareholders
Step three: File your documents
Once you’ve compiled the necessary documentation, it’s time to file it with the local registrar’s office, where it will be processed and verified. You will need to pay a filing fee.
In the US, for example, startups hoping to register a foreign entity in a particular state must submit documentation to the Secretary of State’s office and pay state fees.
In the UK, foreign companies must complete form OS IN01 and pay the associated filing fee via the gov.uk website.
Companies looking to register a foreign entity in Canada must decide which province or territory to register and submit its articles of incorporation to the specific province or territory registry website.
Step four: Receive your incorporation documents
If the examination of your documents has passed successfully, on the day appointed by the registering authority, you will receive the legal documentation, including incorporation and tax certificates.
Step five: Open a local bank account
With the registration documents, you can open an account in a bank of your choice.
Step six: Fulfill annual filing requirements
Foreign entities have many annual compliance requirements, such as annual returns and minutes of Annual General Meetings.
Check out A Guide to Setting up a Local Entity to learn more.
Hire anywhere without worrying about local laws, complex tax systems, or managing international payroll.
Why would you want to register a foreign entity?
A startup may choose to register a foreign entity to:
Relinquish legal responsibility
A foreign entity is a separate legal entity from the parent company and operates under the host country or jurisdiction’s local laws. It’s different from opening a foreign branch office, which is an extension of the main company and is subject to the home country or home state’s laws.
The advantage is that a foreign entity enjoys all benefits that a domestic corporation may have in the jurisdiction and has greater freedom and autonomy in business activities. This autonomy means the parent company has limited liability and is not legally responsible for the foreign entity.
Avoid permanent establishment risk
Registering a foreign entity enables your company to participate in the following activities without triggering permanent establishment risk:
- Register with the local authorities
- Open local bank accounts
- Appoint a local director
- Set up registered offices
- Hire local employees
Benefit from incorporation Incentives
Some countries welcome foreign investment and make the process of incorporating a company simple, sometimes even extending incentives such as:
- Tax incentives
- Free trade zones
- Few restrictions on ownership of foreign companies
- No minimum capital requirement
- Special economic zones
- Faster incorporation process
Protect intellectual property
Your domestic intellectual property (IP) rights have no effect in a foreign jurisdiction since almost all jurisdictions have their own IP laws and regulations. Often, a company will register a foreign entity to protect its intellectual property (IP) and identify in that particular country or jurisdiction.
Your business, product, and domain names are part of your brand. By registering the associated business, product, or domain name, you secure it before a local business entity does. You also gain legal protection that makes your business and IP a separate entity from your own person, which helps you avoid liability if a legal dispute arises.
Why wouldn’t you want to register a foreign entity?
Besides being an expensive and lengthy process, registering a foreign entity is often a double-edged sword for startups hoping to officiate in a new country or state.
Overwhelming compliance responsibilities
A registered company must follow the corporate laws of that new country or jurisdiction, and often the laws tend to be complex for corporate entities. There are also a lot of law amendments that could impact your startup, so remaining up-to-date and implementing ahead of cut-off dates is important to maintain compliance.
Reduced agility
The time and money investment in opening a foreign entity commits startups to a new market. If the new entity starts to struggle, it’s common for founders to retain the foreign entity longer than necessary in hopes that the circumstances will improve or recover. This hesitation can result in large financial losses and delay the company from exploring other more lucrative markets.
More convoluted and less control
When a startup establishes a foreign entity, they often outsource core functions such as compliance, payroll, and HR to external providers. Building internal teams and learning these new processes in a foreign location is a huge undertaking. While outsourcing is a great way to benefit from local knowledge and expertise, it often results in a disjointed and inconsistent worker experience and a lack of control for the company.
Your alternative to establishing a foreign entity
Registering foreign entities might make sense for companies hiring hundreds of people and taking over new markets. Still, there may be better options for startups and large and small businesses planning to hire remote teams and establish a local presence in multiple markets worldwide.
Using an employer of record to hire, pay, and manage talent based in other countries gives you all the advantages of registering a foreign entity without the time, money, and hassle.
When you hire workers through an EOR like Deel you:
Avoid permanent establishment risk
An EOR has established entities in countries worldwide and can legally hire employees on your behalf while you retain the day-to-day management—no need to establish a foreign entity to test a particular market or risk permanent establishment.
Deel is the largest EOR provider globally, with over 20,000 active employees under our 95+ entities. Each of these 95+ entities is solely owned and managed by Deel–no outsourcing to 3rd party providers.
Receive built-in compliance support
We’ve built compliance into our intuitive hiring platform. Our legal experts are on standby 24/7 to support and ensure your startup remains current on local laws and regulations.
Using the Deel platform, you can compliantly:
- Generate employment contracts and contractor agreements tailored to local labor laws
- Automate compliance documentation collection
- Request the signing of DPA, and privacy agreements to protect your intellectual property
- Receive visa and immigration support
- Receive support assigning worker status to avoid misclassification
- Run payroll in alignment with local payroll laws
- Run background checks
- Administer mandatory benefits
- Manage terminations
Enjoy payment flexibility
Instead of outsourcing payroll to a local payroll provider, you can pay your local and international employees and contractors in 100+ countries worldwide via a single platform. You retain control of the entire payroll process, and your workers receive a consistent experience no matter where they live with flexible withdrawal methods.
Using the Deel platform, you can automate the following:
- Employee benefit contributions and withholdings
- Payslip creation and delivery
- Tax filing with local authorities
- Global analytics and reporting
Over 15,000 businesses have chosen to streamline global payroll operations with Deel.
Remain agile
Startups are uniquely positioned to grow with a global mindset, mainly due to their leaner structures, fewer bureaucratic practices, and lower overhead costs, making them more adaptable and mobile. They can pivot if an economic recession hits the UK, a new talent hub opens up in Argentina, or a new market emerges in Japan.
Opening a foreign entity, however, starts to stifle this agility, anchoring the startup to a particular market or talent pool that may not serve the startup’s best interests and deprive it of opportunities over the long term.
With an EOR, startups can hire as many international hires and build a local presence in as many markets as they want within minutes. Want to test a product in the US? Go for it! Not gaining much traction in France? Leave! Can’t source talent locally? Get it somewhere else! With Deel, you leave all the doors open and aren’t putting all your eggs in one basket.
Need a hand identifying the most fruitful talent hubs around the world, check out A Guide to Finding Global Talent.
Take your startup global with Deel
Deel is everything your startup needs to compliantly manage and scale a remote, international team all in one platform:
- Hire EOR employees around the world
- Onboard and manage direct workers, EOR employees, and independent contractors in a single platform
- Create localized work and IP agreements
- Run background checks
- Provide visa and immigration support for relocating workers
- Run global payroll in over 100 countries
- Grant equity to your international team
- Provide flexible benefits and perks
- Provision equipment and flexible workspace memberships worldwide
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