When you’re getting ready to take your business global, you’ll come across a whole lot of new terms which can be a little bit confusing. If you’re looking to expand globally, you’ve probably found yourself asking ‘what is a legal entity’ and how can it be beneficial for my business?
What is a legal entity?
So, the key question, what is a legal entity? Well, it is basically a general term for any kind of business which is required to follow legal obligations set out by governments in the country they operate. It’s like giving something, like a business or a charity, its own personality in the eyes of the law. This means it can do things like enter into contracts, own property, and even get sued.
Types of legal entities
There are a few different types of legal entities when it comes to global business, for example these are some of the options you’ll find in the US:
- Sole Proprietorship: This is when it’s just you doing business on your own. You call the shots, but you’re also personally responsible for everything.
- Partnership: A partnership is teaming up with someone to start a business. You both share the work and the profits, but you’re also both on the hook for any problems that come up.
- Limited Liability Company (LLC): This is like a mix between a partnership and a corporation. It gives you some protection from getting in trouble personally if things go wrong in the business.
- Corporation: It’s giving your business its own life. It can do everything a person can do – like buy stuff and sign contracts – but if something goes wrong, it’s the corporation that’s responsible, not you personally.
- Nonprofit Organization: This is for groups that want to do good stuff without making money. They must still follow rules and be accountable, but their main goal is helping others, not profit.
Should you set up a legal entity when expanding globally?
Setting up a legal entity when you’re taking your business global can come with a list of pros and cons to consider:
Pros:
- You’ll have limited liability; if you choose to establish your business abroad it can provide you with limited liabity protection. This will, however, depend on which type of entity you choose to set up.
- Compliance; having a legal entity ensures compliance with local laws and regulations, reducing the risk of legal penalties and operational disruptions.
- Credibility; if you’re going to be working with local customers, suppliers, partners or even looking to expand further in that country then having a legal entity can give you enhanced credibility within these relationships.
- Tax benefits; depending on which country you choose to expand your business in, having a legal entity can offer tax benefits.
- Hiring people; when expanding globally you’ll probably need to consider hiring people in the new country. Having a legal entity makes this possible without the help of something like an employer of record.
Cons:
- Costs; it will cost your business to set up and maintain a legal entity in the new country. If you’re not looking for long-term expansion or are only looking to hire a couple of people in the new country, then you might be better off choosing another route.
- Failure; just like in any new business venture there is a risk that it might not work. If you’ve chosen to set up a legal entity and the expansion to your selected country doesn’t work, you have more at stake.
- Tax and compliance; being a legal entity can come with tax benefits or make compliance with local laws easier, but there is also a risk of the opposite being true too. Operating as a legal entity abroad may subject the business to additional tax obligations, reporting requirements, and regulatory compliance burdens.
- You’ll have limited flexibility; once a legal entity is established, it may be challenging to exit or cancel operations in the event of changing market conditions, strategic shifts, or unforeseen challenges.
How do you set up a legal entity?
If you’ve decided to go ahead with a legal entity, then it’s time to look at how you set it up? It’s not always an easy process and it can vary based on which country you’re expanding to. There are some services such as us who can actually help make the process easier.
Here’s what you’ll need to do:
- Decide which type of legal entity you’re going to set up.
- Select a name – this might be easy if you want to keep your original business name, but it’s always a good idea to check there’s no restrictions stopping you from using this, or that it makes sense in the new country’s language.
- Paperwork! Now is the time when you need to start the registration process, you’ll need to source and file all the paperwork with the local governments. This can be a bit tricky if you expand to a country that doesn’t speak your language.
- Obtain any licenses or permits you might need. Depending on the nature of your business you might need to get various licenses or permits to even start operating.
- Open a local bank account. This isn’t always necessary, but it can make certain processes easier.
- You’ll also need to start the hiring process for your local team. To do this you’ll need to take some time to understand the local employment laws, as well as getting an international payroll set up.
These steps will get you started, after that you’ll then need to sort out any local compliance, tax filings, and of course if you’re going to have a physical office or business, you’ll have additional work to do.
How can we help with a legal entity?
We offer global expansion services such as expansion advice, fully managed legal entity set-up, and global payroll. So, if the thought of setting up your legal entity on your own is daunting, or you feel you won’t have the specialist skills to complete all the tasks then get in touch with us today!