Challenges of Entity Establishment for Global Business Expansion
Entity establishment, if planned well, can become a powerful tool for global business expansion. By forming business entities in a foreign country, you get the opportunity to plant your roots deep in an international market. However, establishing a global entity internationally has some legal ups and downs.
In this blog, we will take a look at the technical definition of a business entity, some basics of entity establishment, and the challenges faced in establishing a business entity internationally. Each challenge maps to common mistakes businesses make while expanding their business globally. We will mainly discuss entity setup in India as an example.
About Entity Establishment
- What is a business entity?
A business entity is an organization established either by an individual or a group of individuals for the purpose of conducting business with customers or other businesses.
This seemingly simple definition is important to understand. If you want to expand business in an international market, you will have to be very sure whether you want to actually instate a business entity or just want to get remote work done. An established business entity has a separate legal existence for taxation.
Business entities are primarily of 3 types, categorized on the entity structure rather than the nature of your business. Entities can be established as a Sole Proprietorship (single owner), a Partnership (two or more business owners) or a Corporation / Company (owned by a group of shareholders).
2. What is entity establishment?
Entity establishment is the process of setting up a business entity with a set structure, a defined group of stakeholders, a designated economic entity assumption (basically, the accounting for your business transaction), and with the right legal and taxation compliances.
Like discussed above, you can establish your entity as either a sole proprietorship, a partnership (which further can be structured as a limited liability partnership), or a company.
6 challenges of entity establishment
Entity setup in India can become a lengthy process. Moreover, if it doesn’t work out for you, you can’t just close shop. Entity dissolution is another complex process which needs to be completed to shut down an operational business entity.
So, read these challenges as a forewarning, and avoid mistakes in entity establishment in India.
- Licencing Between Entities
Business licences allow a company to conduct their business. A business licence is granted upon signing a licencing agreement, the terms of which are rigid and binding. Every business entity needs to have a business licence, not just every business, since they are independent w.r.t. taxation. So, if you want to setup business entity in India, you’ll need a licence to conduct business in India, despite your organization already being operational in another nation.
2. Payroll Management
Your team working for your Indian business entity needs to be paid as per the compensation policies in India, not your company’s parent location.
With salaries come benefits, perks, and compensations for overtime, paid leaves, insurance, and employee stock options.
You need to have a very hands-on manager for handling these factors and can’t expect the system will run itself.
3. Tax Complications
Not only do you need to pay taxes on the throughput of your business, but because its offshore, every transaction along the way, be it for purchasing goods, infrastructure, or leasing office spaces come with their own taxes. While claiming input tax credit (tax rebates), these business expenses will definitely matter. Not to mention the significantly higher tax rates. For royalties or fees of service rendered, the corporate tax rate for a foreign business entity is as high as 50%.
4. Employee Transfers
Employee transfers take place both ways: your employees in your parent location might need to be transferred to the Indian offices or vice versa. With transfers come the complications of travel allowances, living accommodations, working hours, and salary revisions.
5. Tariff and Fees
The physical goods you need to carry to the offsite locations may not be free to transport. Most goods are attached with a tariff charge, especially while moving resources internationally. Would it be wiser to acquire these resources locally? Can I disturb my supply chain and find a new supplier in the target market? How will it affect my taxes? These key decisions suddenly become crucial.
6. Human Resources
Legal compliances in place, impeccable business structure established, tax complications handled. Can you rest? Absolutely not. The most critical component of an entity are the people who will actually run the day-to-day operations. These may be people you’ve never met before and probably never will. All communications are remote. Their working hours will differ due to changing time zones. Your human resources possibly need the most attention. You need to control their efficiency, look after their morale, and make sure your offsite offices follow the work culture that your Indian employees are expecting. Managing HR is a big challenge of global entity establishment.
These challenges of global entity establishment are difficult to surmount, but not impossible. There are business setup service providers in India who are experts at handling entity establishment. Remunance, through its Indcorporate solution provides company incorporation services to businesses looking to expand to India. Our services are timebound, a 100% compliant, and transparent. Get a partner you can depend on, and make entity establishment a cakewalk.