How to Set up a Local Entity: A Guide

In our increasingly connected world, going global may seem like a natural next step for businesses who want to scale their operations and gain an international presence. For a good reason, too: From diversifying revenue streams to enhancing cost efficiencies, expanding beyond the borders of your home country may achieve numerous benefits.¹

But it also comes with just as many uncertainties, concerns—and questions. One of the most often-asked is, should I set up a local entity in my new market?

The quick answer is maybe. Establishing a local entity might be wise if it’s part of a validated growth strategy. If your primary goal is to gain access to international talent, however, you may want to consider alternative solutions.

Below, we’ll weigh the benefits and nuances involved in setting up a local entity and the types of entities that may be available to you. We’ll also show you how to launch a local entity and offer you key insights on finding and hiring global employees efficiently (and compliantly) in the absence of one.

Let’s get started.

What Is a Local Entity?

A local entity—sometimes called a “foreign entity” or an “international entity”—is a business structure that exists in a separate jurisdiction from its parent (or holding) company.

Consider Apple, for example. The tech giant is headquartered in California but works on a multinational level with business operations throughout²:

Europe
Asia-Pacific
The Americas
The Middle East
Africa

The motivation for forming a local entity is certainly understandable. Some businesses do so to increase sales; other enterprises may profit from lower manufacturing costs.³ Two of the chief reasons for establishing one, though, is to accelerate growth and broaden a business’s customer base.⁴

It’s important to note within all of this that some foreign business entities are legally and fiscally tied to their parent companies (like a branch office or sales office), while others are completely separate (typically called a subsidiary). It’s also essential to keep in mind that opening a local entity requires thorough consideration of its pros, yes, but also an evaluation of its intricacies—topics we’ll turn to next.

Should Your Business Set Up a Local Entity?

Broadly speaking, setting up a local entity is ideal for businesses that want to:

Maintain control over their business operations – Creating a local entity may demand compliance with local laws and regulations, but it also gives you greater control over how your business operates. This may include freely importing supply chain goods and exporting products, and recruiting, training, and managing employees directly rather than working through a third-party organisation or hiring freelance contractors.

Boost brand recognition and trust – There’s a huge difference between a company that “does business” in town and one that complies with a region’s rules and local regulations as a foreign entity. Demonstrating that you’re a legitimate company that respects a country’s standards can make an incredible (and positive) impact on consumers, industries, local governments, and other businesses. In turn, you may enhance your credibility and thrive in your new market(s).

That said, the following considerations should factor into your decision.

The Complexities of Starting a Local Entity

Setting up a local entity entails:

Conducting in-depth market research.

Remaining compliant with regulations and local laws unique to your host country, particularly in the realms of employment, taxation, real estate, and corporate set-up; this may require partnering with local regulatory experts.

A relatively long time commitment that may range from two months to more than six months, as well as a potentially significant lag between cultivating authority in a new market and generating revenue.

A substantial financial investment.⁵

Adapting to local cultures and customs.

Language barriers.

The bottom line on whether your business should set up a local entity comes down to your immediate objectives and long-term goals. If you’re focused on increasing your market size, preserving brand consistency, working closely with suppliers, and/or gaining a presence in a particular country (or countries), opening a local entity might be to your benefit.

How to Set Up a Local Entity

Keen on reaping the rewards of opening a local entity, despite its challenges? The process may vary by jurisdiction, but here’s a brief, step-by-step guide for getting started.

1. Review the Host Country’s Legal Requirements

Entering a new market requires meticulous, even exhaustive research into your host country’s laws and regulations. If you’re a US-based business hoping to expand operations in the European Union (EU), for example, you may be legally required to tweak the language you use throughout your branding, advertising, and packaging.

No matter where you choose to expand, you must become proficient in your host country’s:

Legal structure
Local tax codes
Labour laws and rights, such as discrimination, maternity and family leave rights, wages, working times, and termination⁶
Logistics, including handling supply chains, managing customs, shipping products, and intellectual property^7,8
Governance structure, including minimum requirements for shareholders, directors, and sometimes a board of commissioners
Minimum share capital
Business licences, bank accounts, and annual filing requirements

Foreign regulations are often tricky to navigate and sometimes even opaque. As such, you will likely need to seek legal and tax advice from local experts to ensure your business entity set-up and management are sound and compliant. Bear in mind too that your senior leaders may have to be away from your home operations for an extended stretch of time.

2. Evaluate the Benefits & Limitations of Each Type of Local Entity

Choosing the right type of local entity depends on your global expansion strategy, as well as the local regulations of the market you’ve selected to enter.

Here are the three main types of local entities to consider, as well as their advantages and restrictions.

Representative Office

A representative office is generally the quickest and simplest way to establish a business entity abroad. It gives your business a minimal presence in your target market and allows you to explore its viability before taking expansion to the next stage.

As the name implies, employees working in this type of business entity are representatives of your company only. This translates to the fact they can perform market research, carry out marketing campaigns, and act as a customer liaison, for example, but they aren’t legally permitted to conduct core, transitional business activities, such as:

Sales
Software engineering
Product development

The good news: As representative offices don’t generate revenue, your business shouldn’t be liable for corporate tax in the host country. There’s also less regulatory oversight.

Branch Office

A branch office offers more flexibility than a representative office. It’s considered an extension of the parent company, and, unlike representative offices, employees are authorised to perform fundamental procedures like signing contracts.

This means that branch offices are typically considered to be permanent establishments and liable for corporate tax in the host jurisdiction.

Since branch offices are wholly owned by the parent company, any legal or fiscal liability is held by the parent company, as opposed to a subsidiary where liability remains with the local company.

Separate Legal Entity (Foreign Subsidiary)

A separate legal entity—also known as a “foreign subsidiary” where it is majority-owned—is legally and fiscally distinct from its parent company. Foreign subsidiaries can take various forms, but the most common would be a private limited company.

Setting up a separate legal entity abroad allows you to benefit from:

Local tax rebates
Grants
Other related benefits

Separate legal entities also help protect your parent company from legal risk by isolating liability at the subsidiary level.

However, setting up and running a foreign subsidiary requires a comprehensive examination of your business’s financial health and availability; all in all, it’s considered an expensive and time-consuming endeavour. It may also require the presence of local directors.

3. Register Your Business & Set up Relevant Accounts

Once you choose the type of entity you want to set up, you need to start the establishment process according to local regulations. Again, this will depend on the jurisdiction and type of entity you wish to set up. For example, you may have to:

Provide relevant evidentiary documents
Secure office premises and a registered address
Appoint a local manager or director
Pay associated fees and costs
Acquire a business licence
Open local bank and tax accounts
Set up payroll for local staff
Register for social security
Register with the local tax authority
Relocate or onboard new employees

Once complete, you will also be required to stay up-to-date with local laws and regulations to remain compliant and help mitigate legal and financial risks.

How To Hire International Talent Without a Local Entity

Considering establishing a local entity just to tap into international, top-tier talent, or to hire a select few for initial research into your new market?

You’re not alone—at least in terms of scouting out qualified candidates: According to a survey conducted in 2020, 97% of CEOs in the US said that sourcing talent is their primary goal for business growth.⁹ Further, a survey of 1,250 entrepreneurs in Europe’s preeminent tech hubs found that¹⁰:

21% of CEOs in Sweden named recruiting talent as one of their major concerns for 2024
28% of CEOs in the UK said the same

By and large, businesses are looking at recruiting new employees at the global level. And yet, forming a local entity to do so isn’t always entirely necessary.

A simpler, potentially more effective option may be using an Employer of Record (EOR) service such as Omnipresent.

An Employer of Record (EOR) is a local organisation that hires, onboards, pays, and manages talent on your behalf. While your chosen talent is technically an employee of the EOR, they’re still very much a part of your team. The employee is assigned to your company and carries out the tasks you set for them. This is all outlined within a service agreement that your business and the EOR sign.

As the EOR already has a legal entity in the country it’s operating in, your business can hire international talent without needing to set up your own entity. The EOR takes responsibility for complying with local employment laws, including: