Subsidiary vs. Branch: Best Choice of Structure for Your Growing Business

subsidiary

As your company grows, the time will arrive when you need to consider the next step for the company. This could mean expanding your company to a new location. One of the first decisions you must consider is the demand you seek to fill in your target market and how you want to structure your expansion. When considering the structure, you want to consider if it would make the most sense to have a branch or a subsidiary. To make this determination, we must consider what would be the differences between the two.

Differences Between a Branch and a Subsidiary.

A branch office is simply another location of your company. A branch is an extension of your main office, as if you were adding another room to your current building. When you establish a subsidiary, you are establishing a new business. A subsidiary is considered a separate legal entity. Your corporation must own more than 50% of the voting stock of the subsidiary, though it can own up to 100%. There are two main factors to consider when choosing the best option for your business: taxation and risk.

Branch: Streamlined Taxes and Shared Risk

A branch office is considered an integral part of your parent organization, so filing taxes is more streamlined. Generally, you will not need to file a separate tax return for the branch. However, you will need to submit additional forms and keep documentation of profits concerning the branch office when submitting your company taxes. Additionally, your branch office will comply with the tax laws that apply to the location of your parent company. Regarding financial risk, the parent company is exposed to all risks encountered by the branch office. Anything that occurs in a branch office in one region can easily impact operations at its headquarters.

Subsidiary: Local Taxation and Separation of Risk

A subsidiary is its own legal entity, so generally you will need to file a separate tax return for the subsidiary. As such, it will operate under the tax laws of the state in which it is located. Although it will take additional effort to properly to ensure compliance with the tax laws in the new location of your subsidiary, this move can be made strategically if you wish to take advantage of a business-friendly tax environment. Generally, the financial risk your subsidiary incurs will be separate from that of your parent company. Again, this decision can be made strategically if you wish to minimize risk to your firm while still expanding operations.

Make the Right Choice for Your Company

Each option provides different opportunities. It is important to consider the legal and tax landscape in the region where you are moving. Subsidiaries are ideal for offices looking to facilitate access to the business environment of another location. Branch offices may facilitate operations between locations, but with that ease comes greater risk.

In conclusion, it is important that you make the best decision for your company. Knowing which path you will take in advance will allow you to plan for the necessary legal and tax work. Set up your company for success. It is always advised to consult with professionals before making final decisions. Contact us today at Gonzalo Law for a complimentary consultation to review your options.

References:
1. How to choose branches or subsidiaries in your corporate structure, by Matthew Gilleard. 9/3/2012. http://www.internationaltaxreview.com/Article/3083623/How-to-choose-branches-or-subsidiaries-in-your-corporate-structure.html. Accessed 5/11/2018.
2. Subsidiary vs Branch Office vs Representative Office. 9/8/2017. http://enstoncorp.com.sg/secretary/subsidiary-vs-branch-office-vs-representative-office/. Accessed 5/11/2018.
3. Why Multinationals Prefer and Incorporated Subsidiary, Not Just a Branch, by John P. Gordon. http://www.usa-corporate.com/articles/05052005.pdf. Accessed 5/11/2018.

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