Doing Business Overseas
We international lawyers often get inquiries from companies eager to establish a subsidiary or other entity abroad. This is one of the most exciting but daunting prospects for a company more accustomed to domestic laws, regulations, financiers, and business partners.
In this post, I 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.
Forming a company overseas is not always necessary. At our firm, we’ve seen two common mistakes related to foreign business entities: companies unnecessarily setting one up abroad, and companies failing to establish one when it’s crucial.
For instance, a company selling downloadable software products online might be able to operate successfully in a foreign market by simply having a user agreement that complies with local consumer protection laws. In this case, forming a foreign business entity might be unnecessary overhead.
On the other hand, a company planning to open a brick-and-mortar retail store or manufacture products in a foreign country would almost certainly need to establish a local legal entity. This is because they’ll likely need to hire employees, lease property, and comply with local tax regulations – all of which typically require a registered business entity.
The key takeaway is to carefully consider your business model and the specific regulations of your target market.
The Essential List
Once you have determined that you need a foreign business entity, the following can serve as your checklist of what typically should done 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.
Protect you intellectual property (IP). Safeguard your trademarks, patents, copyrights, and trade secrets in your target market. International IP laws can be complex, so consulting with specialists is necessary.
Comply with local laws. Go beyond the steps mentioned above and ensure adherence to all applicable local laws, including environmental regulations, data privacy laws, and labor laws.
Taking the Next Step
Entering a foreign market can be fraught with risks, and I have seen too many instances (read here) where a company 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. Do yourself a favor and do it right the first time. Your future self will thank you.
