Global workforce

Branch vs. Subsidiary: What Should Companies Choose While Going Global?

Mayank Bhutoria
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One of the most critical decisions that a business has to make while going for a global expansion is whether to establish a branch or a subsidiary. Although these two terms are often used interchangeably, legally speaking, both are different and have distinct legal implications. This article dissects the pros and cons of each to guide companies in navigating the complexities of going global.

What is the difference between a branch and a subsidiary?

A branch is an operational unit of a company in a separate location from its headquarters. A branch functions as an extension of the parent company, carrying out various business operations within a specific geographic area. A branch is always connected to its main office and performs the same business operations as performed by the main office. By setting up a branch, a company can expand its presence into different regions without setting up fully independent entities. 

 For example, Bank of America is a large financial institution with multiple branch offices worldwide. All the branch offices are a part of the main office in North Carolina. Each branch office operates as an extension of the main office, thus reaching out to more customers. 

A subsidiary is a legally independent business entity controlled, either partially or entirely, by the parent or holding company. The parent company typically owns a significant portion of the subsidiary’s shares. A subsidiary maintains its distinct legal identity, governance structure, and financial records. This organizational arrangement allows the parent company to enter new markets while limiting the risks associated with the subsidiary’s operations. Subsidiaries are considered when a company seeks diversified global expansion.

For example, The Walt Disney Company is a larger parent company with a Pixar Animation Studio subsidiary. As the requirement of a subsidiary, Disney has a majority stake in Pixar. Although Pixar operates as an independent entity, it's always under the umbrella of its parent company — Disney. 

Which is better for global expansion & hiring: Branch or subsidiary

While there is no clear answer to this question, business owners need to consider carefully before going ahead with branch expansion or setting up subsidiaries. Some of the important factors to consider:

1- What’s your purpose?

While a branch office is set up to serve more customers with easy administration, a subsidiary has the sole purpose of expanding its business. 

2- What business operation do you want to drive?

While a branch performs the same function as the main office, a subsidiary may operate independently and not conduct the same operations as the parent company. 

3- Legal and regulatory environment

The legal and regulatory environment of the host country should be considered, as each country has its laws and regulations for subsidiaries and branch offices.

4- Tax requirements

Subsidiaries and branch offices have separate tax implications, so you need to consult tax experts to understand the better option for you. 

5- Liability concerns

You also need to assess the liability concerns. For example, a subsidiary can be a better choice if the parent company wants to limit the liability. 

What are the advantages and disadvantages of setting up a branch office?

Setting up branch offices has both pros and cons. In this section, we will discuss some of them.

Explanation


Advantage
Local Market Presence Having a physical presence can help businesses get visibility in a new market among customers and partners.
Better Managerial control The parent company controls the daily operations of a branch office as it has complete ownership of the branch.
Globally recognized Branch offices are globally recognized as part of the parent company.
Explanation


Disadvantage
Losing business opportunities Since a parent company completely controls a branch office, it may lose out on new business opportunities. This happens because the parent company is liable for all debt payments and fines for the branch office. This may discourage local businesses from doing business with a foreign company’s branch.
Regulatory compliance A branch must adhere to regulatory compliance set by both the home country and the host country. Abiding for regulatory compliance of two countries makes it more challenging but time-consuming, too.
Closes in case of loss A branch has to be closed down if it continues to make losses. This can have several repercussions like lack of customer trust, job loss, capital loss of the parent company, etc.

What Are the Pros and Cons of a Subsidiary?

Like branch offices, subsidiaries also have their advantages and disadvantages. Here are some of them:

Explanation
Benefits of a Subsidiary Limited Liability The parent company has limited liabilities on subsidiaries. Thus, the parent company can explore new business opportunities through subsidiaries with limited liabilities yet can control revenue and profits.
Cost-effective A subsidiary is a cost-effective solution because, unlike a branch office, the parent company can invest 50-100% to own a subsidiary.
Enhanced Brand Image A subsidiary helps the brand enhance its image in the local market.
Tax Advantages
Subsidiaries have tax advantages because they can be taxed only in their country or state and do not have to pay for all the parent company's income.
Explanation

Disadvantages of a subsidiary
Closure complexity Subsidiaries involve high establishment and exit costs. For example, if the subsidiary has a lean profit margin and has to exit from the region, it may face complex legal issues.
Lack of control
The parent company doesn't have complete control of the subsidiary. This may result in the outflow of revenue and reputation damage for the parent company.
Regulatory challenges Since a subsidiary operates independently in a foreign land, it may face difficulties adjusting to the new regulatory environment. For example, if there is a sudden change in the regulatory guideline, the subsidiary may experience disruption in its finances.

Real-world examples of branches 

Apple Store: Apple Inc. operates numerous branches globally, showcasing and selling its products directly to consumers. Each Apple Store serves as a branch of the company.

McDonald's Restaurant: A McDonald's restaurant serves as a branch of the global fast-food chain. Each location operates as a branch, following the standard menu and operational procedures.

Toyota Dealership: A Toyota dealership is a branch of the larger Toyota Motor Corporation. Each dealership operates as a branch, selling and servicing Toyota vehicles.

Technology:

Microsoft Store: Microsoft operates retail branches, known as Microsoft Stores, where customers can purchase Microsoft products, get technical support, and experience new technologies.

Verizon Wireless Store: Verizon, a telecommunications company, has retail branches where customers can purchase phones, sign up for plans, and get assistance with their wireless services.

Walgreens Pharmacy: Walgreens operates branches across the United States, providing pharmacy services, health and wellness products, and other retail items.

State Farm Insurance Office: State Farm, an insurance company, has branches (offices) where customers can meet with agents, discuss insurance policies, and handle claims.

Anytime Fitness Gym: Anytime Fitness has branches worldwide, each functioning as a fitness center with 24/7 access for its members.

Marriott Hotel: Each Marriott hotel location operates as a branch of the larger Marriott International, offering accommodation, dining, and event services.

Real-world examples of subsidiaries

YouTube LLC: YouTube is a subsidiary of Alphabet Inc., Google's parent company. It operates as a separate entity specializing in online video sharing.

Audi: Audi is a subsidiary of the Volkswagen Group, focusing on the production of luxury vehicles.

Ben & Jerry's: Ben & Jerry's, known for its ice cream products, is a subsidiary of Unilever, a multinational consumer goods company.

Marvel Entertainment: Marvel Entertainment operates as a subsidiary of The Walt Disney Company, producing comic books, movies, and other entertainment content.

Pharmaceuticals:

Genentech: Genentech is a biotechnology company and a subsidiary of Roche, a global pharmaceutical and diagnostics company.

Sprite: Sprite is a carbonated soft drink brand owned by The Coca-Cola Company, which operates as the parent company.

Zappos.com: Zappos.com, an online shoe and clothing retailer, is a subsidiary of Amazon, an e-commerce and technology giant.

Boeing Commercial Airplanes: Boeing Commercial Airplanes is a subsidiary of The Boeing Company, specializing in the design and manufacture of commercial aircraft.

American Express Bank: American Express Bank is a subsidiary of American Express, providing banking and financial services.

T-Mobile US: T-Mobile US operates as a subsidiary of Deutsche Telekom, a German telecommunications company.

Branch or subsidiary? Introducing Employer of Record

While branch and subsidiary both have their pros and cons, both structures have one common issue — onboarding local talent. Because of branch or subsidiary, hiring in a foreign land can bring in additional complications of adhering to local labor law, understanding the compliance regulations, payment in the local currency, and so on. 

And that’s where Gloroots comes in. Gloroots is a popular employer of record (EOR), making global employment seamless. It helps brands make market entry quick and easy. It allows businesses to test new markets without setting up a new entity. From onboarding to employment compliance and payroll, Gloroots takes care of everything. Want to know how? Book a call today. 

Ready to take your hiring global? Let’s talk. Our experts have got you covered. 

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