In today's interconnected world, technology has revolutionized the way businesses operate, enabling them to tap into foreign markets and leverage the skills of talent across the globe. However, expanding into foreign territories still poses legal and logistical challenges that must be addressed.

Thankfully, businesses have access to a range of solutions that can facilitate their global growth. In our comprehensive EOR vs. Subsidiary comparison guide below, we explore the two most common options and evaluate their respective merits, helping businesses make informed decisions and navigate the complexities of international expansion.

What is a subsidiary?πŸ€”

In the realm of international business, a subsidiary refers to a foreign entity owned or controlled by a parent or holding company headquartered in a different country. Often referred to as a "daughter company", the subsidiary operates as a separate legal and tax entity, subject to compliance with local laws, tax codes, and regulations. Despite being under the oversight of the parent corporation, subsidiaries are fully operational and maintain a level of independence.

Subsidiaries are typically owned by the parent company, which holds at least 50% of the subsidiary's stock. However, it's also possible for the parent company to own 100% of the shares in a"fully owned subsidiary." In this scenario, the subsidiary remains a distinct entity but is wholly owned by the parent company.

Even when the parent company owns a subsidiary completely, the daughter company can still operate independently. However, the parent company retainssome degree of control through its board of directors, which may include the ability to sell the subsidiary without seeking prior approval fromshareholders. Ultimately, the subsidiary structure offers businesses a range of advantages and challenges that must be carefully considered when expanding into foreign markets.

Advantages of a subsidiaryπŸ“ˆ

Overseas credibility πŸŒβœ…

Establishing a subsidiary can be a strategic move for businesses looking to expand into foreign markets, as the subsidiary structure can help buildtrust and credibility among local officials and business leaders. By conforming to local laws and regulations, subsidiariessignal a commitment to responsibleand ethical practices, which can make it easier to attract and retain talent, customers, and business connections. In contrast to a branch office, a subsidiary operates as a separate legal entity,providing greater autonomy and flexibility in decision-making, and ultimately enabling businesses to establish a stronger foothold in international markets.

Liability protection πŸ›‘οΈπŸ›‘οΈ

Businesses exploring international expansion often turn to subsidiaries as a means of minimizing legal risks. By establishing a foreign subsidiary, theparent company can limit its liability as the subsidiary assumes responsibility for local compliance. As a result, the holding company is shielded from potentiallegal issues and associated penalties. In the event of any complications, the parent company can opt to sell the subsidiary, further reducing its exposure tofinancial risks. Thisadvantage makes subsidiaries an attractive option for businesses looking to expand their global presence while mitigating legal and financial risks associated with cross-border operations.

Disadvantages of a subsidiaryπŸ“‰

Vast resources needed πŸ’°πŸ’Ό

While establishing a foreign subsidiary can be a strategic move for expanding a business's global reach, the process is often complex andtime-consuming. Setting up a subsidiary involves several steps, including registering with local authorities, appointing local directors, establishing bank accounts, creating employment contracts, complying with tax laws, and more. This process can take several months and may require significant financial resources, making it costly. Furthermore, a slow-moving process could put a business at a competitive disadvantage, particularly if other companies are planning similar expansions. As such,careful planning and execution are essential to ensure a successful outcome and minimize potential delays and setbacks.

Local knowledge πŸ“šπŸŒ

Expanding a business through a foreign subsidiary requires a deep understanding of the local legal and regulatory landscape, including tax codes, employment laws, and regulations. To maintain compliance, businesses must remain vigilant in monitoring any legal changes and updating their policies and procedures accordingly. Moreover, understanding the local culture is equally important to ensure a thriving workplace. Local customs, practices, and values can shape employee behavior and business practices, making it crucial for businesses to adapt their operations to the local context. By investing in a deep understanding of the local environment,businesses can establish a strong foundation for success in foreign markets while fostering a positive work place culture that resonates with employees and customers alike.

What is an EOR?πŸ€”

Employer of Record (EOR) is a service provider that enables businesses to hire employees and contractors internationally without the need to establish aforeign subsidiary. The EOR acts as the employer for tax purposes and assumes responsibility for various employment-related tasks and liabilities, including payroll, employment contracts, taxes, and HR support. This arrangement allows businesses to access global talent pools while mitigating the legal and financial risks associated with cross-border employment. EORs can be located within the same country or in a foreign nation with different employment laws, providing businesses with greater flexibility and agility in their global expansion efforts.

Benefits of an EOR πŸ“ˆ

Cost and time savings πŸ’°β°

Employer of Record (EOR) services are increasingly popular among companies seeking rapid global expansion. By leveraging an EOR, businesses can quickly enter foreign markets without the need to establish a subsidiary, enabling them to hire overseas talent at a faster pace. The EOR assumes responsibility for local labor and tax laws, handling various employment-related tasks such as payroll, benefits administration, and compliance, allowing businesses to focus on their core business priorities. This arrangement frees up valuable time and resources for HR and People teams to focus on strategic initiatives, such as talent development and employee engagement, while also mitigating legal and financial risks associated with cross-border operations.

Local expertise πŸŒπŸ‘¨πŸ’Ό

One of the key advantages of Employer of Record (EOR) services is that they are already established in the country where businesses seek to hire employees. As a result, EORs have a deep understanding of the local culture and employment processes, enabling them to target and attract the right candidates to fill talent gaps. EORs have a local presence and are well-versed in the nuances of the local labor market, providing businesses with a competitive edge when it comes to hiring top talent. By leveraging the expertise of EORs, businesses can tap into a global talent pool while benefiting from the local knowledge and insights of trusted employment partners.

Drawbacks of an EOR πŸ“‰

Need for multiple EORs 🀝🀝

While Employer of Record (EOR) services offer convenience and flexibility, businesses seeking to expand into multiple territories may require a separateentity in each location. In such cases, the process of researching and partnering with several EORs can quickly become resource-intensive, potentiallyacting as a barrier for organizations seeking the greatest level of scalability. As a result, businesses must carefully evaluate their expansion strategies and priorities to determine the best approach for their unique needs. While EORs can provide a valuable service for businesses looking to establish a presence in a single location, a subsidiary structure may be more appropriate for businesses with broader global ambitions. Ultimately, businesses must weigh the pros and cons of each approach to determine whichoption best aligns with their long-term goals and priorities.

Varied costs and support πŸ’°πŸ€

Not all Employer of Record (EOR) services are the same, and each has its own unique operating model. Businesses may find that one EOR is more responsive and offers better customer support than another. However, managing separate EORs in multiple foreign territories can become challenging, especially if there's limited alignment between them. Furthermore, costs can vary significantly from one EOR to the next, making it difficult to manage expenses and ensure they fit within a business's overall financial strategy. As such, businesses must carefully evaluate each EOR's offerings, costs, and alignment with their long-term goals to determine the best fit fortheir unique needs. By selecting the right EOR, businesses can unlock the benefits of global expansion while mitigating risks and optimizing costs.

Have you considered using a global employment platform instead? πŸ€”πŸŒπŸ’Ό

A global employment platform (GEP) such as ChaadHR can provide businesses with an efficient and streamlined approach to engaging talent from over 160countries worldwide. With a GEP, all team members are managed from a single platform, allowing businesses to access all relevant information in one place. GEPs also handle local labor laws, taking the burden of compliance off the business. Additionally, customer support is available to help businesses navigate the complexities of international hiring, providing peace of mind when it comes to global expansion efforts.

Master global expansion with ChaadHR

ChaadHR helps businesses expand globally. We provide support for testing new markets, hiring employees, and setting up subsidiaries. Our platform offers compliant onboarding of international contractors, remote employee hiring, and consolidated payroll management through a single dashboard. Book a demo tolearn more.