Legal considerations before expanding your business overseas
Once your business has seen success in the US, it might be time for you to consider expanding.
Moving beyond your borders presents a huge opportunity for growth, but you should consider a number of elements before you get started. Countries outside your own often have different legal and tax requirements when it comes to selling goods and services.
So, if you want to succeed in your expansion, you need to carefully consider foreign rules and regulations. Navigating legal hurdles and tax implications is key to taking advantage of growth overseas.
Here, we’ll look at some legal issues you should consider when handling taxes, selling to customers, and paying foreign contractors or employees.
[Related: Nine ways to scale your eCommerce store faster, smarter in 2022]
Determine your business structure
The primary concern for most businesses when debating expanding overseas is whether the unit economics make sense.
One of the questions you should ask yourself is if selling your products internationally in a specific country will make you more money than expanding domestically (from the east coast to the west coast, for example).
Before you can answer this question, you need to know the amount of profit you expect. To determine your expected profit in a foreign country, you need to know how much you’ll be taxed. And how you’re taxed depends on your business structure.
Here are the five common types of business structures:
Sole proprietorship
Partnership
Corporation
S corporation
Limited liability company
What will be taxed?
You should consider a few facts regarding what and how you’ll be taxed.
Foreign company
Setting up a foreign company is essentially setting up a subsidiary of your US company.
This means nearly everything your company does in a foreign country will be taxed in that country. If the tax rate is lower there, then the move works out to your benefit. But if the tax rate is higher, this will cut into your profit.
However, if the tax rate is higher in that country, you might need to rethink your business structure and choose one that’s more suitable.
Permanent establishment
Depending on your operations, having a permanent establishment in a foreign country typically means you have an office, a warehouse, or something else there. Anything attributable to your business that occurs in the country will be taxed there, not in the US.
However, you need to have a process in place to determine what aspects of your operations are attributable in that foreign country. Sometimes this is difficult to figure out, so it’s best to hire someone to help you do so. Unfortunately, this often comes at a high administrative cost.
[Related: Are you paying too much to be global? How to sell in foreign markets without paying too much in fees]
No foreign company or permanent establishment
Sometimes you don’t need to have a foreign company or a permanent establishment in a foreign company to expand overseas. But this depends on your type of operations.
If you have an office, a warehouse, or contractors in the foreign country you expand to, it might be impossible to avoid having a permanent establishment. The smartest thing you can do is speak with a lawyer about your operations and tax considerations to determine whether it’s possible to have a permanent establishment for your business.
If you don’t have a foreign company or permanent establishment in the country you expand to, you’ll have several more options to limit the taxes on your profits.
[Related: Legal and tax implications of expanding internationally into Canada from the US]
Localizing your products or service: Do you have to do it?
Consumer demands vary by country. You’ll likely need to modify your product and service offerings depending on what’s popular (and culturally acceptable) in the country you expand to.
If you end up changing your products or services, then you need to consider changing your legal documents.
What legal documents are needed?
Altering your products or services to suit a local market may require you to tailor your customer documents. Examples of these documents include the following:
Changing these documents will also likely involve provisions that address consumer laws specific to the country you expand to. This is another area where it’s important to speak with a lawyer and ask exactly where changes need to be made. And those changes must happen before you make your products and services available to customers.
How will you deliver your services or products?
When expanding overseas, one of the biggest challenges is reorganizing your supply chain. If your business is entirely online, this is less of a concern for you. But if your operations involve delivering physical products or services, you need to figure out how that can be done.
For example, if your business delivers physical goods, you’ll probably need to reach out to local distributors in a foreign country. You also might need a warehouse to hold and package your products. This is where tax implications come into play, as discussed above.
You also need to create contracts with people who can transport and deliver products. And it’s not as simple as those people signing your US contracts. You need to update your contracts to address the specific local legal requirements and risks.
Another example involves physical service deliveries. If you plan on your business doing so, you need to determine whether you’ll engage with employees or contractors in the foreign country. If you will, you’ll need employment and contractor agreements for those carrying out the physical service. Again, you need to update your US template documents to consider the risks and laws in that foreign country.
Getting legal advice is best practice for this area because employment laws vary considerably between countries. If you don’t follow a country’s legal requirements, you could suffer consequences such as hefty fines or holdups in your overall operations, which ultimately cuts into your revenue.
Key takeaways
Before expanding overseas, you should consider these factors:
What business structure you’ll use, which involves learning what’s most suitable for your business in a certain country
Whether you need to localize your product or service offerings and thus update customer documents
How you’ll deliver your products and services and create contracts for distributors and workers while considering tax implications
Contact Airwallex to assist your business financials
In terms of managing and transferring your money, online Global Business Accounts are one of the best tools you can use. Airwallex offers these accounts in 11 different currencies while also managing legal compliance so you don’t have to.
If you’re ready to get started, sign up today.
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