As it is not a new business entity, it lacks a separate and different designation from the holding company; Therefore, it is necessary to add an identification note identifying the branch in commercial traffic. A legal person may enter into contracts and assume obligations arising from such contracts, assume and pay debts, sue and be appointed by other parties in legal actions and may be held liable for the results of such actions. Keeping track of all the regulatory responsibilities of your legal entity can be both time-consuming and complex, especially if you add multiple entities within a business structure in the mix. Each legal entity receives a Legal Entity Identifier (LEI) – a 20-digit code that serves as a reference to link a company to financial information. LEIs are still not fully standardized, despite the globalized economy we live in, as the laws and regulations that apply to legal entities vary greatly from jurisdiction to jurisdiction. However, an OB is not a separate legal entity from the parent company and does not offer the benefits of parental monetary liability protection. BOs are often subject to a withholding tax of 20%. Without a legal entity, there is no boundary between your company`s finances and liabilities and your personal responsibilities. This means that if your business is sued or goes into debt, you could be held personally liable. Your personal property could be confiscated to pay the debt, or you could be personally sued and face the consequences.
While responsibilities and requirements differ depending on which part of the world the legal entity is registered, you can ensure that each legal entity must submit some form of report to regulators, industry associations, or government departments on a semi-regular basis, whether it`s financial statements, monthly tax returns, or confirmation of director`s information. This is the American scene in a nutshell, but it is not entirely indicative of business practices in other parts of the world. Let`s take a look at the importance of legal entities in other jurisdictions. Schedule a demo to learn how Diligent`s entity and board management software can help you keep your legal entities on the path to compliance. Any permanent establishment could be said to be a branch, since it is a physical place of business or a place of work where business is habitually or continuously carried on in a country where the holding company to which it belongs is not established. One of the most commonly used terms in the world of compliance and governance is legal entity. This term resembles the embodiment of legal language; Both vague and specific, with multiple meanings and no meaning. But it is the glue that holds the entities together. Simply put, without a legal entity, there is no entity to manage. On the other hand, a branch (BO) is a direct extension of an existing legal entity of the group of companies in a new country. This is usually achieved by registering or qualifying a foreign company in another country.
BOs are designed to generate revenue and operate production facilities in a country. These comments have been supplemented by Community regulations, case law and the „Dirección General de los Registros y del Notariado” (Directorate-General for Registers and Notaries/DGRN), so that we can define branches as follows: Not necessarily. As a legal entity, branches must also be registered in the Register of Local Government. Some annual business formalities may not be required, but other accounting and regulatory requirements usually still need to be applied. Branches are often used for very limited or temporary activities. On the other hand, subsidiaries are genuine commercial companies with legal personality, capital, statutes, bodies and administration, etc. Therefore, as in the case of branches, permanent establishments do not have their own legal personality, independence of responsibility, etc. Overall, the domicile, activities, representatives and authorities of the branch must be indicated in the publicly published certificate of incorporation (as well as in the corresponding entry in the commercial register). The main reason for using a subsidiary instead of a BO is to maintain the separation of the company from the parent company. This allows companies to isolate the risk from the amount of capital investment that the parent company has made in the subsidiary. The legal concept is that each company has a unique identity and that parents should not be held de facto liable for subsidiary responsibilities (in the same way that parents of natural persons are generally not held liable for their children`s activities).
Read this article for more information on the role of subsidiary management in limiting the liability of the parent company. Maintaining control over international offices and subsidiaries is a considerable workload and complexity. In a recent survey conducted by EY, 89% of legal leaders reported significant challenges in managing legal entities that raised concerns about transaction readiness. Compliance and legal operations teams must approach the management of these entities from an entity governance perspective. This means keeping a strategic eye on all business requirements and being able to predict the downstream effects of changes in regulations or responsibilities. But what does a legal entity mean and why is it so important to compliance and legal operations teams? A legal entity is a corporation or organization that has legal rights and obligations, including tax returns. It is a company that can contract as a seller or supplier and can sue or be sued. As you can see, while the meaning of a legal entity does not technically change in different jurisdictions, the form and types of legal entity may be different and have different implications for compliance and governance. In Spanish law, there is no definition of branch beyond the provisions of Article 295 of the Commercial Register Regulation. This law introduces certain characteristic indications for the purposes of its entry in the same register.
A subsidiary is more complex than an OR or BO. It is a separate legal entity established in the target country. The definition of a subsidiary is a company in which the parent company owns 50% or more. If the interest is less than 50%, the entity is an affiliate of the parent company if the parent company is a minority shareholder. It should be noted at the outset that the opening or establishment of a branch does not imply the formation of a new company (as is the case for subsidiaries, which will be discussed below). Every country is unique. For example, setting up in France requires a very different approach than Brazil. You need to consider politics, culture, legal system, taxes, etc.
This article provides a summary of each consideration and the advantages and disadvantages of this type of presence. Your business is growing and the company wants to expand its presence in another country. But before you settle down, you need to make an important decision: what kind of legal presence do we want to have? The decision between a representative office, branch or subsidiary results in significant tax, liability, compliance and operating costs. The liability of the branch is not independent of the legal person that creates it, whereas a priori if such independence or autonomy exists in terms of liability between the holding company and the subsidiary. An original legal name must be chosen before a business entity can be formed. This legal name can be changed in the future, but a business entity can only have one legal name at a time. If you do it right from the beginning, you can save significant resources and headaches later. However, not all permanent establishments can be considered as a branch.
Keep in mind that independent internal management should be considered a branch. However, this fact does not necessarily have to coincide with this concept. There are about 15 types of legal entities in the United States that require different variations of documents for legal entities. However, the most common legal structures to choose from are: It depends on the type of business you run. If you sell your homemade crafts on Etsy, you probably don`t need to know the answer to the question „How important is a legal entity?” However, if you`re a startup ready to move on to the next phase, it`s a good idea to consider what kind of business structure is best for your business. The question „What does a legal entity mean?” varies greatly by location. Although a legal entity is always defined in the same way, i.e. as a corporation or organization with legal rights and obligations, its final form may be different. Here`s a world tour of legal entities outside the United States.
Viewpoint: As we expected, the main difference between branches and subsidiaries is that the former are not commercial companies. Consequently, branches do not have their own separate legal personality vis-à-vis their holding company. In the UK or Australia, you could be a sole proprietor or in the US, you could be a sole proprietorship and still be able to do business without creating a legal entity. The important distinction concerns liability. A representative office (RO) is the simplest but most limited form of setting up a business in a country. It is essentially a beachhead. ROs usually have to be registered with the local government and usually cannot generate revenue.