Cost to Setting Up an Entity

Cost to Setting Up an Entity

Cross-border commerce is expected to exceed US$2.25 trillion by 2026, and is increasing at a faster rate than domestic transaction volumes. This growth rate is attracting more companies to go cross-border, as they look for the most efficient ways to expand their global sales and capitalize on untapped consumer segments. And businesses that may already be cross-border players are also increasingly looking for ways to optimize their sales and operations and position themselves for new market entries.

But optimizing your international sales has many considerations. Some of these considerations can, at first, seem relatively straightforward. But others, from managing fraud risk, processing payments, and local regulations can be costly if not planned and managed correctly. When strategizing your international payment structure, the critical question to ask is whether to process your payments locally vs. cross-border.

You can read a full breakdown between processing locally vs. cross-border. But the clear winner is processing locally, as it results in 10% - 30% higher approval rates depending on the market and savings of up to 50% on processing fees. The question then is not whether you should set up local processing but rather what is required to set up local payment processing. Furthermore, is your return on investment to enable local processing greater than the cost to meet the requirements?

The main requirement to access local processing is that you must have a true operational foreign subsidiary or legal entity in the market in which you wish to process locally. While there are several excellent 3rd party tools and services on the market to assist you in setting up an entity, most only help with legal paperwork and fail to cover your risks and the actual costs of setting up an entity. 

These costs can be substantial. There is a vast array of information and opinion that puts estimates of capital requirements to establish a foreign subsidiary from as low as US$100 to as high as $2,000,000. The truth, however, lies somewhere in the middle. 

The goal of this article is to clearly outline the considerations and costs of opening a legal entity outside your domestic market. Creating and maintaining a legal entity requires a large long-term financial commitment and budget. Before you decide to establish a foreign entity, there are costs to consider from the initial start-up phase and throughout the ongoing maintenance of running an overseas entity. These are some of the costs you can expect.  

 

Legal Fees

The first step to establishing your local entity is to incorporate it through the statutory and regulatory mechanisms of the new market. This will require extensive research and likely a certain amount of bureaucratic navigation to ensure you are in line with that country's compliance and tax structures. On average, this can mean upwards of 160 hours of research to complete these tasks. If you also include legal fees, trademark reviews, and registration, in addition to prescribed statutory fees, this can amount to an average cost of approximately US$20,000.

 

Resident Director & Employer Requirements

Another requirement for you to establish an entity and receive a tax ID is hiring a resident director. This person will be responsible for handling legal documentation and representing you in the region should statutory, or regulatory issues arise.

Companies must factor in this person's salary or the cost of a 3rd party company to act as a resident director.  

A resident director is a legal requirement, but the local payment processors will also require your legal entity to have real, local employees above and beyond the resident director. These employee salaries must also be factored in and can range from US$30,000 - $150,000. 

 

Registered Office Address

In a perfect world, it might be possible for all foreign entities to exist as a PO box, but sadly this is not the case. Most countries and banks will require your legal entity to establish a physical registered office address to receive your tax ID. On average, office space can cost you upwards of US$6,000 per month or a minimum of US$500 should you source a co-working space. Regardless of your choice, you need to be aware of this monthly recurring cost and additional carrying costs that include insurance, utilities, and maintenance.  

 

Opening a Bank Account and Maintenance Fees

You will also be required to set up a local bank account to handle incoming & outgoing transfers, foreign exchange, and meet other financial requirements. The average cost to hold an account and the fees that go along with it will average US$25,000 per year per account. 

 

Ongoing Administrative Costs

On top of all these other expenses, you can't forget overhead. Yearly corporate tax filings, financial audits, monthly VAT fillings, payroll, employee insurance, and employee tax all add up against your bottom line. Industry estimates place these combined recurring costs at approximately US$25,000. 

 

However, these costs can vary considerably depending on multiple factors unique to each domestic market. There is no "one size fits all" approach to establishing local entities, as there are dramatic differences between countries, for example, setting up in Germany versus South Korea.

 

Breakdown of cost

Setup & Ongoing Maintenance

Cost (USD)

Legal

$20,000

Registered Office

$6,000

Bank Account

$25,000

Administration

$25,000

Salary

$50,000

Total 

$126,000

 

Conclusion

All these costs combined add up to US$126,000 for just the first year, with US$100,000 in expenses after that per annum. These costs are substantial but do not cover the total investment required. 

Managing multiple regions will add complexities as well as expose you to the risk of fines and penalties if you do not comply with the local regulations. Regardless of the market, you need knowledgeable internal teams with adequate bandwidth to keep up with changing laws and regulations.

Another element you must consider is that in order to unlock the power of local processing, banking regulations will require a local legal entity in each individual country you wish to sell into. While the beauty of ecommerce is that it allows businesses to sell goods or services to multiple markets easily, you still must set up local legal entities in those markets to enable local processing. You may have the business requirements and justification to set up one legal subsidiary outside your domestic market. But the cost and additional complexities of setting up multiple subsidiaries far exceed the benefits of local processing. 

The result of this is that most business process payments cross-border in the majority of markets, not because it is more beneficial than local processing. But because the cost and complexities involved with unlocking the power of local processing are too great. 

 

Our Merchant of Record Model and Localized Platform

We were created to solve this exact problem. With our Merchant of Record Model, we eliminate the complexities and cost of expanding globally. 

By connecting to our platform, your business unlocks the ability to process in-country payments without the costs, risks, or efforts of establishing a cumbersome foreign entity. Instead, you gain access to our global Merchant of Record network and leverage our global corporate structure.  

If you’re still contemplating setting up that local entity, you can do the heavy lifting, or you can leave it to us and do it for a fraction of the cost.