As we enter 2024, more and more tech companies are looking to expand, whether within the country or internationally. This shift is due to digital technologies making it easier to work remotely (as evidenced during the pandemic). In fact, research indicates that 69% of IT leaders are planning to expand in the next year.
However, global (or local) expansion can be difficult, and one of the hardships most companies face is a lack of skilled talent. Studies show that 22% of tech leads consider it one of the biggest skills challenge facing the tech sector as a whole. Wonder why? The major problems arise with the company’s structural and operational aspects that must be tailored based on the regulatory environment prevalent in a new region. The correct structure is very important for company expansion, which brings us to whether you should choose a branch vs. a subsidiary.
A branch and a subsidiary may arise from the same parent organization and demand the same resources as expansion entities. However, there are significant differences between the two. Companies may want to establish a branch vs. a subsidiary, owing to legal compliance requirements when entering a new market or expanding into a new jurisdiction. In this article, we will delve into the differences between a branch vs. a subsidiary, highlight their pros and cons, and educate you about several modern global employment solutions.
But first, let’s define what a branch and a subsidiary mean.
Branch Vs. Subsidiary: Definitions
What is a Branch?
A branch, also referred to as a “branch office”, is a geographical division of a larger business termed as the "head" office, carrying out the same activities and being supervised by a “branch manager” who reports to the “head” office.
An example of a business operating through a branch model is a bank like SBI, also known as the State Bank of India. SBI has its headquarters in Mumbai but serves customers from all over India through its 22,405 branches.
The branch also consists of the same administrative departments, albeit smaller, like marketing, HR, and accounting. A “branch office” is not a separate legal entity and all liabilities lie with the parent company. It is the most common way to expand business through multiple entities in one jurisdiction. A “branch office” is tasked with carrying out regular functions, but higher operations still need to be directed to the “head” office.
What is a Subsidiary?
A subsidiary is a business entity where the parent or “holding” company owns most of its voting shares or stock. It can be “wholly owned”, which means the parent business owns all of the voting shares, or partially owned, which indicates that the “holding” company owns more than 50% of its stock. Many international companies follow this model for expansion.
An example of a subsidiary is Instagram, WhatsApp and Facebook, all owned by the parent company, Meta.
A subsidiary is a separate legal entity from the “holding” company. This implies that it has separate tax obligations from the parent business and can maintain its accounts separately. A subsidiary can also draw up and sign contracts under its own name. Moreover, it does not have to conduct the same activities as the parent business. This, in turn, implies that the “holding” company is not always accountable for the actions taken by the subsidiary.
Next, let’s understand the differences between a branch vs. a subsidiary.
Branch Vs. Subsidiary: Major Differences
In this section, we will discuss the primary ways a branch is different from a subsidiary.
- Business Operations
While a branch and a subsidiary may share structural similarities, they still have different corporate structures.
A “branch office” performs the same tasks as a “head” office, albeit on a smaller scale. A “branch” office is also not supposed to perform any duties otherwise not directed explicitly by the “head” office. Subsidiaries, however, are not required to conduct the same business as a parent or “holding” company. It may or may not perform the same functions. Subsidiaries can function autonomously to accomplish the parent company’s goals.
- Ownership Stakes
This is, perhaps, the most fundamental difference between a branch vs. a subsidiary. A branch is always 100% owned by the parent company. On the other hand, a parent company holds a majority of a subsidiary's voting rights or stocks. If a subsidiary is 100% owned by the “holding” company, it is referred to as a “wholly-owned” subsidiary.
- Governing Provisions
This is applicable to a branch vs. a subsidiary set up by an umbrella organization in India.
Under the Companies Act 2013, the constitutional framework of subsidiaries is regulated under independent provisions, as opposed to a branch. A “branch office” is not expected to operate under such regulations, considering they already function under the parent company’s explicit directives.
- Reporting Hierarchy
In the case of a “branch office”, the parent company typically delegates authority and accountability to the “branch manager”. This professional, in turn, is expected to report back to the “head” office about the ongoing operations in a particular branch. In contrast, a subsidiary answers, as a whole, to the parent or “holding” corporation.
- Legal Status
A “branch office” does not face any legal consequences, with the parent company taking full responsibility for any liabilities since it has a 100% ownership stake in the branch.
However, in the case of a subsidiary, it is a separate legal entity from the parent company. A subsidiary can not use the assets of the "holding" company as payment for any legal issues or financial losses it suffers because it operates primarily on its own.
For these reasons, a subsidiary has to maintain separate accounts and its individual finances, as opposed to a branch, which can set up separate or joint accounts. Furthermore, a “branch office” facing a loss can be shut down without any consequences to other branches. But if a subsidiary faces a loss, the parent business can sell it to another company.
BONUS: So, should you set up a branch vs. a subsidiary?
You can open a “branch office” to provide easier administration, increased business coverage and greater distribution of products and services to customers. On the other hand, establishing a subsidiary is done for purely business expansion. Any earnings made by a subsidiary are generally reinvested in other businesses and assets owned by the “holding” company.
Now that you know all about the differences between a branch vs. a subsidiary, let’s check out the pros and cons of each.
Pros and Cons of Opening a Branch
You can open a branch office by investing significantly less than a subsidiary. This is because there are no share capital requirements and few compliance costs.
- Greater Level of Control
In the case of a branch, the parent company can control 100% of the day-to-day operations, even if the branch is in a foreign region. That’s because they have 100% ownership stakes. The process of closing a “branch office” is also simpler. This is because the employees can be transferred, assets can be redistributed and the parent company can manage any outstanding debts.
- Predictable Tax Benefits
Most countries make companies sign double treaties when they are opening a branch in a new territory. This implies that the tax benefits are more predictable and businesses can save more money by opening a branch.
- Visa and Immigration Problems
If you are a foreign business opening a branch office, you may face various limitations in sponsoring visas to hire workers from outside, depending on the country. This could also restrict transfers within the larger organization as well as the formation of a global team. On the other hand, recruiting local talent may be difficult since it is not a local company.
- Commercial Unreliability
Local businesses often prefer dealing with locally established companies for trust. Foreign branch offices, lacking separate legal status, run the chance of evading local debts but pose risks like international litigation in disputes. This may deter local engagement, resulting in missed business opportunities for the parent company.
Pros and Cons of Forming a Subsidiary
- Local Market Presence
When you set up a local subsidiary of a foreign business, local entities are much more likely to engage with the subsidiary. Establishing a subsidiary elevates the brand perception of a business in local markets.
- Flexibility of Investment
Since the subsidiary is a separate legal entity, it is an excellent choice for foreign companies looking to expand their horizons, minus the investment risk. Yet the “holding” company can effectively control its profits! Depending on the risks connected to the new market location or business niche, the parent company can invest in or sell the subsidiary to another company if it is bleeding money.
- Enhanced Local Compliance
Regulatory restrictions can be a thorn in the side of most foreign businesses looking to expand. In the case of a subsidiary, most companies offer the same compliance benefits that they would to a local business.
- High Exit Cost
If a subsidiary is not performing per expectations, it can be a difficult and long-drawn-out process to shut it down. Local ownership of subsidiaries can result in complex legal issues and financial complications during an exit, incurring a higher exit cost for the parent business.
- Lack of Administrative Control
In the case of a subsidiary, the parent company may retain voting rights, but it is essentially an independent authority. This means that while a subsidiary’s employees and management may make decisions that hamper the “holding” company’s reputation and revenue streams, the parent business can do little about it.
Why is Rapid a Better Choice for Global Business Expansion?
Opening a branch may be more advantageous for a company looking to expand into a new market because it allows for establishing a representative entity at a lower cost and retains more control over day-to-day operations. However, setting up a subsidiary may make sense for long-term presence due to its increased compliance, local market presence, and financial flexibility.
However, neither can fully enable you to employ and onboard local talent compliantly.
This is where an Employer of Record (EOR) solution like Rapid comes in. Rapid helps you seamlessly onboard and support local employees from India on your behalf with its all-in-one, feature-rich suite of services, including digital onboarding, contract management, payroll and benefits administration, and compliance management.
With a solution like Rapid onboarding top-notch talent from India for you, you can establish a local market presence quickly while adhering to compliance regulations, closing your operations just as fast (if needed). Our experts will understand your requirements and help your team save time and money by automating the navigation through local contract and compliance requirements.
Schedule a FREE demo to expand your business in India with Rapid today!