How to legally structure an international expansion
International expansion represents an excellent growth opportunity for any business. However, before starting this process, it is essential to establish a legal structure that ensures efficient operations and compliance with applicable regulations.
What legal form should you choose for international expansion?
One of the first strategic decisions is determining the legal structure under which the company will operate in the new country. The main options—branch, subsidiary, or joint venture—each come with advantages and disadvantages that must be carefully analyzed to avoid legal risks and maximize investment success.
1. Branch: a direct extension of the parent company
A branch is an extension of the original company and does not have separate legal personality. It operates in the foreign country under the ownership of the parent company, although it may have some degree of local management autonomy.
Advantages:
Administrative simplicity: registration is often faster than setting up a new company.
Low initial costs: many countries do not require minimum share capital.
Direct control: the parent company retains full control over operations.
Disadvantages:
Unlimited liability: the parent company is directly liable for the branch’s debts and obligations.
Restrictions: in some countries, branches face limitations in public tenders or financing access.
Perception of temporariness: may be seen as a weaker commitment to the market.
A branch is advisable for a fast initial entry into a foreign market while maintaining tight control from the headquarters.
2. Subsidiary: a locally incorporated entity
A subsidiary involves creating a new legal entity in the target country. It is fully or majority-owned by the parent company and is incorporated under local corporate law.
Advantages:
Limited liability: the parent company is only liable up to its capital contribution.
Greater trust: local customers, suppliers, and authorities often prefer to deal with domestic entities.
Operational flexibility: easier to adapt to local regulations and business practices.
Disadvantages:
Costs and procedures: requires compliance with local incorporation and company law requirements.
Full tax obligations: subject to the host country’s complete tax regime.
A subsidiary is ideal for long-term international expansion, especially when planning significant investment and local hiring.
3. Joint venture: strategic alliance with local partners
A joint venture is a partnership between two or more companies to jointly conduct business in a specific market. It is common to partner with a local entity to facilitate business operations.
Advantages:
Market and resource access: the local partner contributes market knowledge and business networks.
Risk sharing: investment and risk are distributed among the partners.
Regulatory facilitation: in regulated industries, a local partner may be key to securing licenses or permits.
Disadvantages:
Complex relationships: requires a clearly defined shareholders’ agreement outlining rights and obligations.
Conflict risk: lack of clarity can lead to disputes over management or profit distribution.
Dependence: excessive reliance on the local partner may arise.
A joint venture is recommended when entering strategic sectors, regulated markets, or environments where local expertise is critical.
Conclusion: key considerations for legally structuring international expansion
International expansion is a major growth driver but demands a well-planned legal strategy. Choosing between a branch, subsidiary, or joint venture depends on many factors, including business goals, desired level of control, available resources, and the characteristics of the target market.
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