These days, businesses that are quickly growing don’t necessarily know the ‘do’s and don’ts’ of expanding into new jurisdictions. In this post, we will dive into the key issues you should project manage as you plan your expansion beyond borders.
Elon Musk, Jack Ma, Steve Jobs. Each of them started small but shared an outsized goal of making the world a different place. Eventually, they all accomplished this, becoming some of the most influential entrepreneurs the world has ever seen, and scaling their businesses globally.
Almost every business owner I’ve met has similar-sized ambitions. Few are content with staying small. They want to build something that can make a massive impact and become a household name.
But the gulf between aspirations and reality is often vast. You may be standing in your way by not doing something important from the beginning: thinking globally.
Location. Location. Location.
When your company is looking to expand business overseas, pay attention to where and why. Especially the “why.” For instance, many American companies are setting up in various portions of Europe because of the critical talent in those areas. Once you’ve decided on the best location for your business to grow, it’s then time to hire. In your country of choice, you may need to hire a country manager that can help build a team as well as a person or many who can run that facility in areas including administrative, R&D, sales, etc.
Next, you have a few different ways you can expand into your chosen country. The smallest footprint you can have is a rep office, one being established to run market research, but governments have strict limits on how long you can have a rep office. For example, in Singapore, you can only set one up for one-year, but you can get a two-year extension. So, know exactly what you plan to accomplish. Setting up a subsidiary will be the right choice if you want to send a message that you are there to stay.
If you establish a local subsidiary or other local legal entity, you may need to establish a minimum capital reserve, make your entity subject to legal liability in that jurisdiction, pay taxes, comply with corporate formalities around incorporation, shareholder and board meetings (how frequently and where they are held), local directors and shareholders (nationalities) and more, maintain a local corporate secretarial function, make public disclosures of your accounts, maintain a bank account and comply with local commercial rules that impact how you record revenues and bookings.
While sometimes your business is simple enough that compliance can be managed by an outsourced service or local law firm, some jurisdictions will require you to have people on the ground.
People in places
As you start your operations, next, you’ll have human capital considerations. When you hire somebody overseas, you need to follow local laws. For instance, in Poland, the contract must be bilingual if you are a foreign employer. Bilingual requirements exist in many countries, including Canada, France, Germany, Russia, Ukraine, and Japan. However, in other countries like Singapore and Australia, you will not need to worry about this.
Additionally, you may have to find a payroll service, but there are limitations in some countries, including China, Serbia, and Russia, to get capital into and out of the country. So, it might be necessary to open up a local bank account to pay your local employees. In some countries, you are even able to wire the money to the employees and the government.
How you pay your people may have currency requirements.
Whether you are bringing in human capital locally or from the home country, you may need to complete pre-hire checks and comply with immigration regulations.
Employment regimes
In certain countries like Poland, employment is a matter of the contract, not at-will, which is different in a country like the U.S. The U.S. is the only country that offers employment-at-will. You can say, “I do not want you to work here anymore.” And then you can leave at that moment. But, in most countries, you have to give notice by contract and get severance.
Most countries have collective bargaining agreements, which sometimes can benefit you, while other times not. For instance, if you are party to a collective bargaining agreement (CBA) in Sweden, it negates the need to deal with each employee as a bargaining unit, negotiate with the union or the CBA, and all the employees fall under it. Depending on the country, you have to comply with local working time regulations – for instance, you can’t work on weekends in France. And, in California, if you work more than eight hours a day or 40 hours a week, you’ll receive overtime pay.
When it comes to expanding your business, the right hiring process is just as necessary as the proper exit process. This protects you from being sued for employment practices. By executing the correct standard, the right contract, and the country’s law, you ensure no breach of your contract for the employee or the employer. Next, you have to think about benefits because even though you have an infrastructure that supports medical care in many socialist countries, most employees are used to having supplemental benefits.
Intellectual property protection
This also relates to intellectual property if you hire contractors to do your development work in a foreign country. The IP they are creating may belong to their contractor and not to the company paying for it, so it’s key to have agreements in place with the contractor, so you own your IP.
If you are conducting R&D or exploiting patents or trademarks created in the home country, local intellectual property regimes will be essential in protecting the IP that you create, export, import and ultimately monetize. Sometimes, that might also mean the capability to enforce your IP rights in a country.
Compliance requirements
Beyond employment law, there are compliance requirements to pay close attention to. For example, you may need to have a registered office or provide an office address to the local government. The office might need to be staffed during business hours if somebody wants to give notice, or the government wants to get in contact with your business. In some countries, like Spain, this is changing to an electronic system where you must have a registered email that the government can use to send communications.
When it comes to data privacy, there seem to be new and overlapping (if not contradictory) national, regional, and local regulations published every day. In Europe, the General Data Privacy Regulation, or GDPR, has strict requirements that apply to companies far beyond the borders of the European Union. The China Data Protection Directive has civil and criminal repercussions to those accessing Chinese consumers through the Internet and otherwise. Recently, the California Consumer Privacy Act, or CCPA, became subject to enforcement. Going global means threading the needle to ensure that you have compliant solutions everywhere you are doing business.
Taxes
Depending on your footprint, it could create a “permanent establishment,” which makes some portion of your revenues subject to tax in a particular jurisdiction. If you establish a permanent establishment, you will have to file a tax return at the end of the year. Even if you do not have a permanent establishment, you may need to file another type of tax return and comply with other requirements.
Additionally, there are tax requirements from both an indirect perspective and a direct perspective. For instance, if you are making a lot of money, you might have requirements to pay estimated taxes during the year and file the income tax return at the end of the year.
Summing it up
Technology, life sciences, medical device, and clean energy companies can not be successful when confined to one or more jurisdictions. Indeed, by definition, they know no borders. To disrupt markets and build share, new businesses increasingly need to grow faster, and go global, from the earliest stages of development. Accessing global markets is key to achieving value and liquidity, and ultimately, ubiquity. Good advisors are critical to helping companies define and execute on a mission to expand their business globally.
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Louis Lehot is the founder of L2 Counsel, P.C., an elite boutique law firm based in Silicon Valley designed to serve entrepreneurs, innovative companies and investors with sound legal strategies and solutions. Mr. Lehot is a corporate, securities and M&A lawyer, and he helps his clients, whether they be public or private companies, financial sponsors, venture capitalists, investors or investment banks, in forming, financing, governing, buying and selling companies. He is formerly the co-managing partner of DLA Piper’s Silicon Valley office and co-chair of its leading venture capital and emerging growth company team.
Kateryna Mamyko-Golomb is a law clerk with L2 Counsel, P.C. She advises corporate clients, startups, and investors. She graduated Cum Laude from Northwestern University Pritzker School of Law. Previously, Kate clerked with a major global law firm in Silicon Valley, and prior to her LLM, Kate led an independent corporate law practice in Central and Eastern Europe and served as General Counsel for one of the leading startup accelerators in the region. Kate graduated Summa Cum Laude from Taras Shevchenko National University where she published her thesis: “Government Regulation of Technology Venture Investment” and clerked for the Kyiv District Attorney.
L2 Counsel, P.C. is an elite boutique law firm based in Silicon Valley designed to serve entrepreneurs, innovative companies and investors with sound legal strategies and solutions.
