In the UAE, expanding your business can be challenging for global expansion but are you still unsure which path — branch or subsidiary — best suits your business goals?
Here is the ultimate guide to understanding what is the difference between a subsidiary and a branch. So without any further delay, let’s dive in:
What is a Branch?
The branch is a geographically distinct extension of a pre-existing business that operates under the same business as the parent, and the branch has no separate legal identity.
Think of the branch is an extension of the parent, running under the same name and control. It shares its business activities, resources, assets and management, and business activities with the parent.
The branch works to add revenue to the parent company, and it doesn’t have its own structure for execution because it operates under the parent’s operations. Not only this, the liabilities and branch operations are also tied to the parent company. In other words, the parent company is liable for all the actions that happen in a branch.
Branches are common in banking, retail, and multinational organizations where the business expanded into different regions for market reach.
What is a Subsidiary?
A subsidiary company is a business that is owned by another company known as the parent or holding company. Generally, the parent company may hold more than 50% of the subsidiary’s shares. When we talk about the subsidiary, it is considered an independent company due to its separate legal identity and control. It has its business activities, assets, resources, and management team.
The purpose of the subsidiary is to enter into different geographical markets and industries to enable the growth of the overall company without affecting the core business.
In easy words, we can say subsidiary is a business unit or division dependent on the parent company while keeping the operations distinct. In addition to that, subsidiaries are responsible for all the liabilities and debts until the parent company doesn’t guarantee them.
The most famous example of YouTube was acquired by Google LLC which itself is a subsidiary of Alphabet Inc. As we can see, YouTube and Google, both are working on its rules without the involvement of Alphabet Inc.
Key Differences Between a Branch and a Subsidiary Based on Important Parameters
Legal Entity
A branch is a confined legal entity from the parent company. It operates under the same legal framework and is a part of the parent company. In contrast, the subsidiary company is a separate legal entity with its own policies and legal framework. A subsidiary in Dubai requires legal setup and registration in addition to a business license from the Dubai Department of Economic Development (DED)
Financial Reporting
The finances of a branch are integrated with the parent company. It means that the parent company is responsible for all the profits, losses, and liabilities that happen in a branch.
On the contrary, the subsidiary is responsible for all the damage, debts, and earnings, to maintain its financial records and statements. Although the subsidiary financials are separate, but they consolidate with the parent company’s financials if the parent holds 50% or more shares.
Operational Control
A branch can’t make independent strategic decisions and is controlled by the parent company. Think about the 327 different branches in 62 different countries of HSBC that work under the integrated framework in the parent company. Conversely, a subsidiary runs with its operations, so the subsidiary has its own management team, rules, and regulations.
Branding
A branch usually operates under the same brand identity as the parent company, so the slogan or logo for the branch is the same as the parent firm.
Subsidiary companies, however, run under different names with their content. For example, Google is a subsidiary of Alphabet with a separate identity.
Setting up a Branch vs. Establishing a Subsidiary
When it comes to a business setup, a branch might be more suitable for companies looking to expand quickly without the need for a separate legal entity. In contrast, establishing a subsidiary involves more complexity but offers exceptional benefits such as a unique and independent presence.
After understanding the key differences between branch vs. subsidiary, you need to know the pros and cons that will help you make an informed decision between these two.
Pros and Cons of Branch and Subsidiary
Pros of a Branch
Cost-Effectiveness
Establishing a branch is less expensive than setting up a subsidiary. As mentioned, the branch’s identity is confined to the parent, So it saves on administrative and legal costs. From establishment to subsidiary occupation, the parent company is responsible for everything.
Greater Control
A branch directly works on the same framework as the parent company. So it is easy to control the whole branch rather than the subsidiary. It’s easier to say that if the company works on the same principle as its parent company rather than both companies working on distinct operations.
Cons of Branch
Visa Issues
Branches cannot sponsor visas for hiring international employees. Why? Because the branch is another similar component of its parent with no legal identity. Hence, less credibility. Therefore, countries often prioritize local employees and may impose stricter regulations on foreign to ensure they are not hiring foreign workers at the expense of the local talent.
Commercial Reliability
Branches work as per the decision of the parent company. So, branches take time to respond to their local customer needs. Since branches follow corporate strategies, products, or services that don’t align with the expectations and preferences of local market needs. In addition to that, people see the branches with the perception of the parent company so it’s difficult to gain the trust and loyalty of local customers.
Pros of Subsidiary
Local Market Presence
A subsidiary operates as a distinct local brand that adapts according to market conditions and consumer preferences. Why? Because it is independent and can tailor its decisions according to the market needs.
With its own strategies, products, and services based on the market’s demand, Subsidiaries can hire employees without requiring the parent company’s permission. With a separate brand identity, it’s easier for the subsidiary to gain trust in the marketplace.
Investment Flexibility
Investment flexibility with a subsidiary is generally high because of its status as a separate legal entity. A subsidiary can have its own capital which allows the parent company to invest funds specifically into the subsidiary without affecting the parent company’s overall finances.
Cons of the subsidiary
Brand Divergence
The subsidiary may create a huge brand difference from the parent company, leading to inconsistency and confusion. Customers may not recognize if the parent and the subsidiary use vastly different logos, messaging, or visual elements.
Suppose the parent company and subsidiary provide different levels of services, quality, or customer engagement. In that case, it can also confuse customers who expect uniform standards across all the parts of the business which undermines trust and loyalty.
Management Complexity
Since the subsidiary is a separate legal company with a unique name. At the same time, operating a subsidiary requires greater management complexity to ensure alignment with the overall parent strategy. With different strategies, assets, management teams, and rules, it is difficult to handle the subsidiaries by parent. Hence, it leads to complexity in management.
Final Words
Both branches and subsidiaries offer unique opportunities for global expansion, but they differ in terms of their framework, legal structure, and market approach. A subsidiary works independently allowing for greater market adaptation and investment whereas a branch operates as an extension of the parent company with less flexibility and local control.
Before establishing a branch office and a subsidiary, we recommend you consider factors like local market presence, control, and investment flexibility to enhance your business globally. Each has its own advantages and challenges, that can affect your business strategy.
Open a Branch or a Subsidiary with Xpert Advisory’s Expert Guidance
Opening a subsidiary or a branch is not as easy as it seems. However, with the help of professionals at Xpert Advisory, the process can be simplified without hassle.
Right from offering valubale consultation to handling all the legal procedures related to open a company i.e. subsidiary and branch, Xpert Advisory is there to with you at every step. We can help accelerate your dream product or service launch in foreign markets without requiring your physical presence. Do not wait any further and contact us today to get started!
FAQs:
Q. Primary difference between branches vs subsidiaries?
A. Both branches and subsidiaries have their own advantages and disadvantages. A subsidiary is better due to its flexible approach without restrictions while the branch is controlled under the same company. As there is a difference in a legal entity, a branch takes less time whereas a subsidiary requires a lot of time to establish.
Q. Why set up a branch instead of a subsidiary?
A. Because the branch held by another company or parent company that requires less time and effort.
Q. Is a branch a firm?
No, The branch is the part of the company that has no legal entity but is dependent on the holding company.
Disclaimer: This blog is intended for informational purposes only. The content is provided “as is” and we make no representations or warranties of any kind regarding its accuracy, completeness, or suitability. Any reliance on the information is at your own risk. We are not liable for any losses or damages arising from the use of this blog.
* – Fees and Costs Mentioned are for Reference Only.
