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Venturing into new markets is a thrilling opportunity for your business, and selecting the correct structure could dictate whether or not your business will head toward success. It being such a big deal makes this decision a big one. So now you can choose one of these two options for your company: a branch office or a subsidiary. If you are scratching your head at what these terms are, don’t worry. In this article, we will analyze the difference between a branch office vs a subsidiary and help you make a suitable decision for your business expansion plan. Let’s get started!
What is a Branch Office?
A branch office, which is an additional establishment of a parent company, functions in a separate or other geographical area. It performs the same or similar business activities as the parent organization. The branch remains legally dependent on the parent company. In other words, the parent company holds full responsibility for the operations, liabilities, and responsibilities of the branch office.
Subsidiary Company: Definition
A subsidiary is a separate legal entity owned (fully or partially) by a parent company. The parent usually owns a majority of the subsidiary, providing control and liability protection. Subsidiaries function independently of the parent company, operating under local law, and allow a business to expand to new markets and industries. A subsidiary differs from a branch because the subsidiary has its own legal identity. By creating a subsidiary, the liability to the local operating entity goes through the subsidiary.
Pros of a Branch Office
Some of the significant reasons to choose this legal structure are:
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Local Market Presence
Setting up this structure offers you an opportunity to tap into the local market. It gives you the chance to showcase your products and services in the market and differentiate your venture from the competition. However, this does not guarantee the immediate success of your business in the market. As many natives prefer their home brands over foreign ones.
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Enhanced Managerial Control
When the parent company establishes this venture in a foreign country, it wholly owns it. It helps centralize and standardize all your services. It helps in managing quality. However, many experts believe this aspect is challenging for many small businesses to maintain. It is hard for them to monitor many locations and ensure that all of them retain the same grade.
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Cost-Effective Expansion
Setting up this legal entity is considered a much cheaper alternative than starting a brand-new company. However, this can be different when you compare it in various jurisdictions.
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Lower Taxation
Since it is not considered a separate legal entity, it may benefit from tax treaties. A subsidiary can take advantage of tax benefits offered by the jurisdiction where it is set up. However, this does not always apply. Depending on the location where you choose to set up, incentives can vary.
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Easier Closure or Restructuring
It is usually easier and less expensive to shut down or restructure a branch than to close any other legal entity. This is because a branch is not a separate legal entity. However, this can come with its own set of issues, such as bureaucratic red tape, because your company operates in a different country.
Reasons to Choose a Subsidiary Company
Major considerations before proceeding with this legal entity are:
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Risk Diversification
These entities are known for minimizing the risks of their parent companies. The parent company spreads the risk by creating different entities. It helps limit the impact and minimize losses. However, this is not a foolproof plan, and in no case can it offer complete protection.
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Resource Sharing
By utilizing the resources from their parent companies, these entities can accelerate their growth. They can also adapt to the local market and make decisions quickly. Giving a much more flexible stronghold to the parent company in the local market.
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Access to New Capital
When you set up such an entity, you are able to access new capital without directly diluting existing shares. It offers you financial flexibility and allows you to use your capital in a much more effective way. It also lets the company have its independent assets, contracts, and so on.
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Strategic Partnerships
These ventures can also explore various avenues for collaboration with local businesses, which include partnerships or joint ventures that draw upon their knowledge base and networks in order to expand further in the market.
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Various Revenue Streams
By establishing these entities in different markets, a parent company can diversify its income sources from other markets and minimize its reliance on one particular market.
Difference Between Branch and Subsidiary Companies
After learning the meanings and features, you must think about the difference between a branch and subsidiary companies. Don’t sweat it! In the table below, we, in the most straightforward way possible, will help you understand this:
| Aspect | Branch Office | Subsidiary Company |
| Legal Identity | It is not a separate legal entity. It operates as an extension of the parent company. | Separate legal entity from the parent company |
| Ownership | Wholly owned by the parent company. | The parent company holds a majority stake (>50%) or full ownership. |
| Control | Directly controlled by the parent company. | Possesses independent management. The parent company exercises control through shareholding. |
| Business Activities | Limited to activities approved by regulatory authorities; generally cannot engage in manufacturing. | Can engage in a wide range of business activities, including manufacturing, subject to local regulations. |
| Taxation | Taxed as a foreign entity, often at higher rates. | Taxed as a domestic company, potentially benefiting from lower tax rates. |
| Liability | The parent company is fully liable for the branch’s obligations. | Liability is limited to the subsidiary. The parent company’s liability is confined to its investment. |
| Compliance Requirements | It requires approval from central banks and compliance with specific regulations. It faces stricter oversight. | Governed by local company laws, compliance requirements are similar to those of domestic companies. |
| Financial Reporting | Financial results are consolidated with the parent company and may not require separate financial statements. | Maintains independent financial records; required to file separate financial statements. |
| Funding | Funded directly by the parent company. It may face restrictions on local borrowing. | Can raise capital independently, including local debt and equity financing. |
| Closure Process | Closure involves winding up the branch’s operations, subject to regulatory approvals. | Involves formal liquidation or sale; must comply with local legal procedures. |
The lingering question is: which one wins in the debate between a branch office and a subsidiary company? There is no one answer to this question. The answer depends on many factors. Like your business needs, the chosen jurisdiction, and so on. But we know that the process of making the decision can take a toll on you. That is why we advise you to consult an expert like Business Setup Worldwide. They are known for offering top-notch services to entrepreneurs, and they have helped more than 7,000 of them take their business global. Contact them today to explore your options!
