Technology has enabled the globalization of business, allowing companies to scale by entering foreign markets and leveraging overseas talent. While expanding into foreign territories may be easier than ever before, it still poses certain legal and logistical challenges.
Fortunately, there are solutions available to facilitate global growth. Discover the two most common options and how they stack up in our EOR vs. subsidiary comparison guide below.
What is a subsidiary?
A subsidiary is a foreign company owned or controlled by a larger organization headquartered in another country. The subsidiary may be referred to as a daughter company, while the larger corporation may be called a parent or holding company.
Subsidiaries are their own legal and tax entities separate from the parent company and are fully operational. They must therefore comply with local laws, tax codes, and regulations. But they still report to the parent corporation, which typically owns at least 50% of the subsidiary’s stock. It’s also possible for the parent company to own up to 100% of shares in what’s known as a “fully owned subsidiary.”
Even when the parent company owns a subsidiary completely, the daughter company can still operate independently. The parent company retains some control through its board of directors, including the ability to sell the subsidiary without prior approval from shareholders.
Benefits of a subsidiary
Creating a subsidiary allows you to expand into foreign markets in a way that may garner more credibility among local officials and business leaders than a branch office would. Since the daughter company must conform to the region’s regulatory landscape, locals may be more inclined to trust the company. This could make it easier to attract and retain talent, customers, and business connections.
One of the most compelling reasons for businesses to use subsidiaries is the ability to operate internationally while minimizing legal risks. Parent companies face limited liability since the foreign subsidiary is held accountable for local compliance. Therefore, the holding company is not financially responsible for legal issues or other penalties. Should any issues arise, the parent company can sell the subsidiary.
Drawbacks of a subsidiary
Vast resources needed
Establishing a foreign subsidiary is expensive and can take several months. There are many steps involved, including registering with authorities, setting up bank accounts, appointing local directors, creating benefits packages and employment contracts, establishing payroll, and satisfying local tax laws, among others. A slow-moving process could put you at a competitive disadvantage if you know other companies are planning similar expansions.
Not only do you need to be familiar with applicable local tax codes, employment laws, and regulations, but you must also monitor any legal changes and update your policies and procedures accordingly. In addition, you also need to understand the local culture in order to create a thriving workplace.
What is an EOR?
An Employer of Record (EOR) is a company that employs an individual on behalf of another business. An EOR can be within the same country or in a foreign nation with different employment laws. This arrangement allows you to hire employees and contractors internationally without needing to establish a foreign subsidiary.
If your company works with an EOR, the EOR will act as the employer for tax purposes. It will also assume responsibility for tasks and liabilities related to employment, including payroll, employment contracts, taxes, and HR support.
Benefits of an EOR
Cost and time savings
Companies seeking rapid global expansion are drawn to EORs because they allow quick entry into foreign markets. There’s no need to set up a daughter company, so you can begin hiring overseas talent quickly. You also won’t have to worry about local labor or tax laws, as the EOR manages everything on your behalf. This frees up time and resources for your People or HR teams to focus on core business priorities.
EORs are already established in the country where you’re looking to hire. This means they have an in-depth understanding of the local culture and employment processes. They’ll know how to target and attract the right candidates to fill your talent gaps.
Drawbacks of an EOR
Need for multiple EORs
EORs can be convenient, but if your business is looking to expand into multiple territories, you might need a separate entity for each location. The process of researching and partnering with several EORs can quickly become resource-intensive and may be a barrier for organizations seeking the greatest level of scalability.
Varied costs and support
Not all EORs are the same, and each has its own unique operating model. You may find that one EOR is far more responsive and offers better customer support than another. If you have employees in more than one foreign territory, managing separate EORs can become challenging if there’s limited alignment. Plus, costs will vary from one EOR to the next. This can make it difficult to manage expenses and ensure they fit with your business’s overall financial strategy.
What about a global employment platform instead?
A global employment platform (GEP) like Oyster enables you to easily engage talent from over 180 countries worldwide. All Team Members are managed from a single platform where you can see all the relevant information. Local laws are handled for you, and customer support is always on hand to help you figure out the intricacies of international hiring.
Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.
Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.