03We international lawyers often get calls and emails from companies looking to set up a subsidiary or other company overseas. This is one of the most exciting but also daunting prospects for a company more accustomed to domestic laws, regulations, financiers, and business partners.
In this post, we will briefly look at the key things to consider when looking to form a company in a foreign country to ensure that having a company in a foreign jurisdiction is both optimal to your business plan and done efficiently and safely.
Do You Really Need a Business Entity?
If I were to list the ten most common mistakes the international lawyers at our firm see, not forming a company overseas and unnecessarily forming a company overseas would both be on that list. Today’s post will not dive into either of those issues, but it is important to keep that point in your mind as you consider whether and how to take your company international.
The Basic List
Once you have determined that you need a foreign business entity, use the following list of what one typically should do to form a company in a foreign country and then operate it legally there:
Determine whether your business model is legal in the foreign country. This is not a given because some businesses that are legal in some countries are not legal in other countries. And in some countries, businesses that are legal for domestic companies are not legal for foreign companies, and sometimes business models (think direct sales / multi-level marketing companies) that are legal at home are not legal abroad.
Form and register your company in the foreign country. You should find out which business entities are most commonly used by foreigners because there will be good reasons. Many countries have minimum capital requirements attendant with entity formation, and these requirements vary significantly from country to country. Few countries are like the U.S., where there is no minimum capital requirement.
Lease property. Some countries — China in particular — require this, though where and what type of real estate you need to lease will depend on your business model. If you are just forming a company with minimum operations to test the foreign market, then you may be able to use a simple lease or a pseudo lease by utilizing a mail drop address. These minimal leases are commonly used by foreign companies first coming to the U.S. Your in-country accountant or bookkeeper may be willing to provide this service for your company at the early stages and will often be willing to assist with other foundational requirements.
Hire employees, including local directors. Some countries — Thailand in particular — require hiring local employees. Other countries like Indonesia and Ireland require a certain number of local directors on the board. These types of countries also usually require written employment contracts, significant HR assistance, and employee benefits and tax payments.
Open a bank account in the foreign country. Some countries require you to immediately open a bank account, especially if you will be hiring employees. Most often whether you need a local bank account will be dictated by your business model. Your Wells Fargo account in the U.S. will not work for your foreign-based company, even if you bank with Wells Fargo. Local bank requirements will govern the type of account you need and sometimes will govern which banks you can utilize in-country, depending on the country. If you are able to use the same bank in-country as you do at home, you will be able to satisfy the bank’s “know your client” requirements more easily.
Figure out and pay a whole host of taxes. Just by way of a staggering example, the typical city in China has around 40 mandatory employer benefits and taxes. In general, the more employee-friendly a country is, the more taxes you will pay. Don’t forget to research the available government concessions for bringing your venture into the country, but also note that these government-provided benefits will always have a sunset provision.
I have been through too many transactions (read here) where the prospective seller did not lay the proper groundwork for their foreign business. That cavalier attitude can work for a while, but it will cause you serious repercussions down the road with potential buyers, even if you manage to avoid the local taxing or employment authority’s scrutiny while you are operating in-country. Do yourself a favor and do it right the first time. Your future self will thank you.