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 a branch vs. subsidiary, or if you have any other options. 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 opening an entity in a foreign country opens up great opportunities like more trade options, a larger marketplace, and a larger talent pool. 

As organizations expand internationally, they usually choose between a branch or subsidiary. Both have their pros and cons, and you should carefully consider which structure fits your company's needs best before making the decision. (Small businesses that are simply looking to hire talent in a new country can partner with a global EOR service like Justworks.)

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, while also providing insight into which structure might best fit your company’s global expansion. 

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

An extension of your main office or business, branch offices are representative offices that normally have a branch manager and report back to a head office. The parent company still has 100% control over the branch office and 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 holding company or parent company of the subsidiary owns at least 50% or more in stakes. Any liability that occurs falls on the subsidiary instead of the parent company, as the parent company is considered separate. 

What are the pros of opening a branch office? 

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 head or main office of the company.

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. A subsidiary usually has around 50% ownership by the parent company. If a parent company owns 100% of the subsidiaries stakes, 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.

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. Parent companies normally have an agreement with the parent company. 

What are the cons of a branch office? 

Branch offices, however, have a lot of limits of how they can function. Branch offices are legally owned by a subsidiary, so they operate under the parent company and have to wait to make decisions based on stakeholder approval. 

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. The parent company is responsible for all liabilities, tax problems, and compliance issues that may arise, so they are much less likely to make changes or take risks as to  how the branch operates. 

Visa issues

Branch offices aren’t normally allowed to sponsor visas or bring employees from another country. Most importantly, branch offices can’t hire employees within their country, 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, 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 businesses choose to first explore the new local market through a branch office, and if there are positive results with the branch, 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 businesses 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 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. Political, legal, or social changes that occur within a country can make it a lot more difficult for the subsidiary to adjust – especially without their being full ownership by the parent company. 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 a branch. 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 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 an EOR service to help you with processes like compliance, hiring, and payroll. 

Partnering with an EOR service

When using an EOR service like Justworks, 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 one 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.

Justworks Can Help Manage International Hiring

Choosing the right EOR to help you expand your business internationally can be a game changer. Justworks’ global EOR services enables small businesses to hire international employees quickly, pay them in the local currency, and provide local benefits. It’s hard to know where to start and what to put in place abroad to protect business and your employees. At Justworks, we have in-country legal teams and entities set up to ensure that your payroll is protected and that you’re remaining compliant abroad. 

From access to top talent pools around the world to streamlined international hiring processes, the advantages of working with an EOR (and using Justworks) are undeniable. Get started today. 

FAQ

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. 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.