An owned entity is a legally distinct business structure a company establishes in a foreign country. It's wholly owned by the parent company and operates under its control and governance.
An owned entity enables companies to conduct business activities in the host country while adhering to local regulations, taxation, and compliance standards. It also allows them to hire locally without hiring HR and payroll providers.
Examples of owned entities include, for example, subsidiaries, branch offices, and representative offices.
Why do businesses consider establishing owned entities?
Companies planning to tap into foreign markets may consider registering an owned entity for several reasons.
More operational control
Establishing an owned entity grants operational control and ensures the direct execution of business strategies and decisions. Companies can seamlessly align their global vision with on-ground operations, making real-time adjustments and optimizing processes for maximum efficiency. This level of control is especially valuable when introducing new products, services, or innovative approaches tailored to local customer preferences.
Stronger market presence
An owned entity's physical presence establishes a tangible connection with local customers, fostering trust and credibility. This hands-on approach enables companies to actively engage with potential clients, conduct market research, and address customer needs promptly.
Access to talent
Accessing local talent is a strategic advantage that goes beyond language proficiency. Local employees bring a deep understanding of cultural nuances and consumer behavior, which is vital for tailoring products, services, and marketing strategies to resonate with local audiences.
Mitigated risks
Owning an entity allows companies to align with local regulations, reducing legal and regulatory risks. Non-compliance with foreign laws can lead to fines, legal battles, and reputational damage. By establishing an owned entity, businesses ensure a transparent and compliant approach to market entry.
Strategic agility
An owned entity provides the agility to adapt to changing market dynamics swiftly. Companies can promptly respond to local competitors, economic shifts, and emerging trends, making real-time strategic decisions about their workforce and business.
Key challenges of registering an owned entity
Well-established brands may have the resources to invest in setting up owned entities worldwide, but smaller businesses face several challenges when registering in foreign markets.
Complex setup
Setting up an owned entity involves navigating legal, financial, and administrative intricacies. This process requires meticulous research and preparation, from understanding local regulations to structuring the entity appropriately. For example, a software company expanding into a new country must grasp local intellectual property laws, licensing requirements, and contractual obligations, ensuring full legal compliance. This entire process can take up to a year, stopping a business from quickly expanding and seizing opportunities.
Time and cost
Establishing an owned entity is not just an investment of resources but also a considerable expenditure of time. The comprehensive steps, including legal paperwork, permits, and approvals, demand significant time allocation. Financial resources are required for legal consultations, government fees, office space if needed, and operational setup.
Local compliance burden
Operating an owned entity involves navigating a complex web of local laws, labor regulations, and tax codes. Adhering to these diverse and evolving compliance standards demands a dedicated effort. Failure to comply can lead to fines, legal disputes, and reputational damage. For instance, a business must ensure its workers are correctly classified based on local laws, as the definition of an independent contractor vs. employee may vary by country.
Limited flexibility
While owned entities offer stability, they can sometimes limit flexibility in responding to changing circumstances. Exiting a market or scaling down operations might involve significant legal and financial complexities, including termination requirements for local team members. This can hinder an organization's ability to adapt to unforeseen market shifts or strategic changes swiftly.
5 best practices for establishing owned entities
Consider implementing these best practices for your owned entity to thrive in a foreign market.
- Conduct thorough market research to identify the most suitable markets for expansion based on demand, competition, and regulatory ease
- Seek legal, financial, and regulatory counsel to navigate local complexities and ensure full compliance
- Develop a robust, tailored HR strategy that aligns with local labor laws, cultural nuances, and talent needs and invest in suitable tools that will enable maximum operational efficiency and security
- Create a realistic budget that considers setup costs, ongoing expenses, and potential challenges
- Ensure seamless coordination between headquarters and the owned entity to maintain consistency and shared objectives
Alternatives to registering an owned entity in a foreign market
Your global expansion plans can still be executed even if you determine you won't be able to allocate the required resources.
These are some of the options:
- Partnering with local entities can provide market insights, shared resources, and reduced financial risks
- Hiring local independent contractors, which helps companies benefit from local expertise without setting up a physical entity
- Leveraging an EOR allows companies to operate in a foreign market without setting up an owned entity, as the EOR handles legal, payroll, and compliance aspects
Whatever your choice is, Deel can help. You can legally hire from over 150 countries through one platform while running payroll for all your workers under one roof, automating HR processes like onboarding, and having access to immigration support experts or real-time analytics and insights into your global workforce.
