Branch vs. Subsidiary: Which Is the Best for Global Expansion?

Introduction

Expanding your business across different global markets is an essential part of growth for modern organizations and a source of risk and stress. At the same time, you determine the best form of expansion.

Before you expand your global business, you must understand all the options available to you and weigh them against one another to determine which is the wisest business decision.

Understanding the difference between a branch office and a subsidiary is essential to know how you want to scale your company and the benefits of various growth forms.

This article highlights what branches and subsidiaries are, the difference between a subsidiary and a branch, and the advantages and disadvantages of each option.

What Is a Branch Office?

A branch office is an office where your company conducts its business. Although opening branches is becoming less desirable for many companies due to the move toward remote work, branch offices are essential to running a business by providing a physical workplace where employees and clients can meet.

Think of traditional office space as a branch; if a company has one office in Los Angeles and another in San Francisco, then there is a branch office in each city, but they are simply different offices for the same company. The people working in both cities are employees of the same company and may even work together regularly.

Companies typically open more branches to hire employees in new areas and expand into new markets. Still, each company branch is working toward a unified goal of ensuring the business thrives.

Branch offices benefit companies because they allow one or more company representatives to operate in different geographical locations, an essential function for many businesses providing goods and services.

What Is a Subsidiary?

The concept of a subsidiary is slightly more complex than a branch, as a subsidiary is a separate company. A different company, either a holding company or a parent company, owns a subsidiary company.

A holding company is a company that doesn't offer any goods or services but instead exists to own majority stock in subsidiary companies. By contrast, a parent company is the primary shareholder in subsidiary companies and plays an active role in the business conducted in its subsidiaries.

Whether your company is considered a holding company or parent company, you must own more than half of the shares in the subsidiary company to maintain control and sell the subsidiary. However, your company can own up to 100% of the subsidiary, which is called a wholly owned subsidiary.

Companies often opt to own subsidiaries as it diversifies their business offerings. Take the company, Proctor & Gamble, for example; P & G owns dozens of subsidiary companies in the home and personal care industries, including Tide, Oral-B, and Pepto Bismol. Because they own these subsidiaries, they can appeal to customers with various needs.

Branch vs. Company: Forming a Subsidiary or Opening up a Branch Office

Now that you understand the difference between a branch and a subsidiary, you may wonder which option is best for your expanding business. To answer this, you should evaluate your business needs to determine which option you should pursue.

When evaluating a subsidiary vs. a branch, you should consider which will best meet your business needs. A branch office benefits companies that need to grow their business into new physical markets. For example, allowing local practitioners to use your products is a necessary part of your business operations if you sell medical supplies.

This means you will need warehouses and office spaces in each region you plan to operate your business. In this instance, you should open new branches in areas where you plan to store products and hire local employees to partner with regional clientele.

If you wish to expand into different markets, however, then forming a subsidiary may be beneficial to your business. For example, if you're a fast fashion company but want to create a sustainable fashion line, establishing a subsidiary with entirely separate branding and business practices ensures that you can control both businesses while appealing to two different markets.

One of the primary considerations when forming a subsidiary instead of opening a new branch is that each subsidiary is an independent legal entity, which means that different laws may apply to each business, and you will need to file taxes separately for each.

Whether you form a subsidiary or open a new office branch, you must remember that your businesses must abide by all local tax and labor regulations in each area you plan to operate. This can become particularly complicated when expanding to foreign markets, where each country has its own, sometimes hugely different, laws.

Consider partnering with a global staffing solution like Skuad as you expand your global business to ensure you're remaining compliant in each new region to which you expand.

Advantages and Disadvantages of a Branch Office

Consider the following advantages and disadvantages of opening a new branch office.

Advantages

• Opening new branch offices are less expensive than forming subsidiaries. Forming subsidiaries is expensive; opening a new branch office is typically the more cost-effective option.
• More control over business functions. When companies open a new branch office, they retain complete control over the business operations and employee functions, which is not always the case when forming a subsidiary, which is a separate entity.
• Better brand recognition. Opening new branch offices ensure that your company can continue to operate in new areas under the same company name. If your company has a positive reputation, you can carry this with you to new regions and have a built-in client base.

Disadvantages

Puts strain on the business. When companies open a new branch, they must be prepared to handle their expanding business. Companies can get into trouble when they need more time or money to operate out of their new location effectively.

Advantages and Disadvantages of a Subsidiary

Consider the following advantages and disadvantages of forming a subsidiary.

Advantages

• Increased market share. Subsidiaries allow companies to increase market share by owning multiple subsidiaries that appeal to different clientele.
• Substantial tax benefits. Companies with multiple subsidiaries can receive tax benefits from lowered liability, mainly if the subsidiaries are in separate regions. Parent companies can compensate for financial gains from one subsidiary with financial losses from a different one.
• Reduced risk. Forming subsidiaries allows companies to enter new markets without putting their business at high levels of risk. Because the subsidiary is considered a separate legal entity, the parent company will not be held financially accountable.

Disadvantages

• Forming and sustaining subsidiaries can be expensive. Parent companies should be sure they can afford it before selecting this option.
• Forming subsidiaries can be time-consuming. In addition to the expense, parent companies should be aware of the substantial time investment required to establish a subsidiary.
• When weighing the advantages of opening a new branch office vs. forming a subsidiary, it's important to remember that there are better options than one option. Instead, you should determine which of these options better meets your business needs and weigh the pros and cons.

Freedom From Setting up Various Business Entities for Expansion

As you grow your global business, compliance with all local laws and regulations poses a significant challenge. Whether you plan to open a new branch office or form a subsidiary, each region in which you expand will have unique requirements that your company must abide by.

As your business expands globally, hiring employees worldwide will become necessary to ensure operations run smoothly. However, each new country where you hire an employee will require you to establish a legal entity to operate compliantly.

Establishing legal entities can take several months and prove extremely expensive, with considerable hidden fees. In addition, without the help of a global employment and payroll platform like Skuad, your employees will be responsible for learning the ins and outs of local tax and employment laws.

Utilizing an employer of record (EOR) bypasses the need to set up various business entities, as the EOR will act as an employer of foreign employees on your behalf. Therefore, you will not need to set up subsidiaries or branches. In addition, EOR providers like Skuad can also provide your company with regional expertise in more than 160 countries, allowing you to grow your international team in minutes.

Understanding How Skuad Can Help You Expand Your Global Business

Growing and managing your global business is a complex and time-consuming process that can have dire consequences for your company if it's done incorrectly. As your business expands to new global markets, you will need to consider more and more local regulations.

Partnering with a global employment and payroll platform like Skuad saves your company the time and money necessary to establish legal entities in each new country you grow, allowing you to focus on business operations and expansion.

Request a demo to see how Skuad can help you hire and manage your international team, making it easier to grow your global business.