Establishing a subsidiary company and opening a branch are two forms of business expansion chosen by many businesses. In fact, both forms can perform functions such as entering into contracts for the purchase and sale of goods and services, carrying out production activities, recruiting employees, etc. So, should business owners establish a subsidiary or a branch? Advantages and disadvantages of each type? To answer the question, LSX legal firm provides this article to give you an insight into this problem: “Should I establish a subsidiary or a branch in Vietnam?”
Legal ground
- Law on Enterprise 2020
Subsidiary company
A company is considered a subsidiary of a parent company when the parent company owns more than 50% of the shares or a smaller percentage but allows the parent company to legally control the business of the subsidiary company.
Subsidiaries can be established in different forms but are all independent legal entities with the parent company. Subsidiaries enter into legal relations on their own behalf. The subsidiary’s management apparatus run its own business operations. Thus, the parent company can only participate in deciding issues related to the organization and operation of the subsidiary through the competent authorities of the subsidiary.
Company branch
Firstly, according to Clause 1, Article 44 of the Law on Enterprise 2020:
Article 44. Branches, representative offices and business locations of an enterprise
1. A branch of an enterprise is its dependent unit which has some or all functions of the enterprise, including authorized representative. The business lines of a branch shall match those of the enterprise.
As can be seen, a branch is no different from a subsidiary of an enterprise. It can perform to the fullest extent of all functions of an independent business even though it has no legal status.
Particularly, a branch can directly perform transactions of purchase and sale, export goods within its rights, import goods, input materials, and perform the production and storage of goods, inventory, and distribute products to the market. At the same time, it can also operate PR activities to promote products and goods, and services provided by the company.
The scope and function of the branch may be similar to that of the company. And of course, the company can decide to reduce the branch’s powers at any time. In addition, the company can authorize the branch to perform the work beyond the scope and authority of the branch.
Advantages and disadvantages of subsidiary company
A subsidiary company means a company in which part or all of the charter capital held as well as controlled by another enterprise. It can be seen that a subsidiary is a business model established by another enterprise and provided with capital to operate in a number of business fields corresponding to that enterprise.
On the first hand, a subsidiary company has some advantages:
- The opening of a subsidiary branch will help businesses expand their desired new business lines without affecting the parent company.
- Facilitating multi-industry operations, easy management of revenue and expenses, increasing competitiveness, etc.
- Subsidiaries have legal status as well as business registration certificates.
- A parent company can create many subsidiaries. As result, subsidiaries operating in the same industry or field will promote production and business for the parent company.
On the other hand, a subsidiary company has disadvantages:
- The owner of the parent company only liable for the extent of the capital contributed to the company.
- Subsidiaries must not transfer pre-tax profits to the parent company because they must pay corporate income tax at the company’s headquarters.
Advantages and disadvantages of company branch
A branch means a dependent unit of the enterprise; responsible for performing all or part of the functions of the enterprise, including the function of an authorized representative. The branch’s line of business must comply with the business line of the parent company.
Advantages of a company branch:
- Opening branches in many locations will increase awareness of people on the brand, and attract customers more effectively, leading to increased revenue, profit, prestige, and recognition.
- Besides, helps businesses spread financial risks and receive support from other branches.
Disadvantages:
- The branch financially depends on the parent company. So, the parent company takes responsibility for solving financial problems arising from the branch’s business activities.
- A branch only has the right to represent when authorized by the company and must comply with the conditions and processes prescribed by law.
- The owner must take full responsibility for dissolution or bankruptcy.
Should I establish a subsidiary or a branch?
Basically, both branches and subsidiaries are capable of performing business functions such as entering into contracts for the purchase and sale of goods and services; carrying out production as well as recruitment activities.
In addition, regardless of the form of establishment, branches and subsidiaries have to pay license tax; value-added tax, corporate income tax, and other taxes according to the operation of each unit…
Therefore, whether to establish a subsidiary or a branch will depend on the purpose of each subject.
A branch is essentially a unit of the company and only operates in the field of business lines of the company.
A subsidiary company means the investment capital of the parent company. The parent company can invest 100% of the capital or can cooperate with other individuals or organizations to open a company (The parent company always accounts for 50% of the capital or more;, and the subsidiary can completely register the business lines similar as well as different to the parent company.
Overall, the establishment of a branch or a subsidiary depends on the development needs of the company and the advantages and disadvantages of these two forms.
LSX legal firm’s service on company establishment
When establishing a company, people must carry out the procedure following the law at the competent business registration authority (under the Law on Enterprise 2020). The process of establishing a business includes many different steps and phases. If you are not familiar with the law, this process may take a lot of time.
With a team of experienced, reputable, and professional consultants; The firm is always ready to support and work with clients to solve legal difficulties.
Furthermore, using our service, you do not need to do the paperwork yourself, We guarantee to help you prepare documents effectively and legally.
Also, you will not have to waste time preparing the application, submitting application, or receiving results. At those stages, we will help you do it smoothly.
After all, LSX provides the service with the desire that customers can experience it the best way. Additionally, we guarantee the cost to be the most suitable and economical for customers.
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Related questions
After you prepare all the documents and submit them to the Business Registration Office; Within 03-05 working days, the Business Registration Office will process and return the results of registration of the establishment of a company branch for you.
In terms of operational functions, if your company produces and supplies kinds of goods, you should set up a branch. If your company provides services, you should set up a representative office.
Branches of the company are allowed to perform the function of producing and trading goods and providing services, generating revenue and profits. Therefore, if the independent accounting method is applied, the branch will have to pay the license fee annually.
Contact LSX
Finally, hope this article is useful for you to answer the question about “Should I establish a subsidiary or a branch in Vietnam?”. If you need any further information, please contact LSX Law firm: +84846175333 or Email: [email protected]
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