Branch vs. Subsidiary: Which Is Right For Your Company? 

Expanding your business is a major milestone that’s worth celebrating. But to make the most of this opportunity, you’ll want to choose the right structure, which can impact your tax obligations, legal liability, financial reporting, and operational control. 

Whether you’re a U.S. company expanding internationally or a foreign business entering the American market, you’ll need to decide between establishing a branch or forming a subsidiary. Each option has advantages and drawbacks, depending on your business goals, tax strategy, and compliance requirements.

At USA Tax Gurus, we help businesses address relevant tax laws, international regulations, and financial planning so that they have the best chance of success moving forward. Our licensed CPAs and EAs can provide you with the expert guidance you need to reduce your taxes while increasing profitability through our tax planning or remote CFO services. In this guide, we’ll go over the key differences between branches and subsidiaries, their legal and tax implications, and how to determine which is the best fit for your business.

What Is a Branch?

A branch is an extension of the parent company that operates in a different location but remains legally and financially connected to the main business. Since it is not a separate legal entity, the parent company is fully responsible for all liabilities, profits, and taxes associated with the branch.

Branches are often used when companies want to expand operations without forming a new corporate entity. This structure is therefore common for multinational corporations, banks, and retail chains that want to maintain full control over their foreign or domestic locations.

How Do You Set Up a Branch?

Since a branch is an extension of the parent company, the setup process is generally simpler and less expensive than forming a subsidiary. However, businesses still need to comply with local regulations, tax requirements, and licensing laws.  

Below is a general guide to establishing a branch office for your company.  

Determine the Location and Legal Requirements  

Before setting up a branch, you need to choose the jurisdiction where you want to expand: 

• For domestic expansions, research state-level regulations on business licensing, taxation, and reporting. Some states have stricter requirements for foreign (out-of-state) businesses, including additional registration and annual fees.  
• For international expansions, check local business laws, tax policies, and foreign investment restrictions. Some countries have higher corporate taxes or additional reporting requirements for foreign branches, so understanding the regulatory environment is important.  

Register the Branch with the Appropriate Authorities  

Since a branch is not a separate legal entity, it must be registered under the parent company’s name. The registration process varies depending on whether the branch is being set up within the U.S. or internationally.  

To set up a branch in another U.S. state:  

• Register as a foreign entity with the Secretary of State in the new state.  
• Obtain a Certificate of Authority to operate as an out-of-state business.  
• Assign a registered agent to handle legal documents in the new state.  
• Apply for any state-specific business licenses or permits.  

To set up an international branch:  

• Register with the local corporate regulatory body in the country where the branch will operate.  
• Obtain a business license from the relevant government agency.  
• Ensure compliance with foreign ownership laws, if applicable.  
• Open a local business bank account to handle branch transactions.  

Obtain an Employer Identification Number (EIN) and Tax Registrations  

A branch must comply with federal, state, and local tax regulations. In the U.S., this means:  

• Obtaining an Employer Identification Number (EIN) from the IRS for tax reporting purposes.  
• Registering with the state tax department for income tax, sales tax, and employment tax obligations.  
• Understanding how branch income is taxed, as some states may impose additional franchise taxes or levies on out-of-state businesses.  

For international branches, businesses must:  

• Register with the local tax authority for corporate tax compliance.  
• Understand how branch profits will be taxed both locally and in the parent company’s home country.  
• Consider whether any tax treaties exist between the two countries to prevent double taxation.  

Open a Business Bank Account  

A branch needs a separate business bank account to handle financial transactions, payroll, and tax payments in the new location. Many banks require:  

• Proof of business registration in the new jurisdiction.  
• A copy of the parent company’s Articles of Incorporation or other formation documents.  
• A registered agent or local representative to manage the account.  

International branches may also need to comply with foreign exchange regulations and local banking requirements.  

Establish Operational and Financial Reporting Processes  

Since a branch is not a separate legal entity, its finances must be consolidated with the parent company’s financial statements. Businesses must:  

• Maintain detailed records of branch revenue, expenses, and payroll.  
• Implement internal controls to monitor financial transactions.  
• Ensure the branch follows the parent company’s accounting and compliance policies.  

For tax purposes, some jurisdictions require annual filings and audits for foreign branches. Staying compliant with financial reporting regulations is necessary to avoid penalties.  

Develop a Tax Strategy for Your Branch  

Since a branch is directly tied to the parent company, its profits are taxed as part of the parent entity. However, businesses should:  

• Understand how branch income will be taxed in both jurisdictions (if expanding internationally).  
• Consider foreign tax credits or tax treaties that prevent double taxation.  
• Determine whether any transfer pricing rules apply to transactions between the parent company and the branch.  

Consulting with an international tax expert ensures that your company minimizes tax liabilities while remaining fully compliant. 

Advantages of a Branch

One of the biggest advantages of opening a branch is its simplicity. Since a branch is not a separate legal entity, there are fewer administrative and compliance requirements compared to a subsidiary. You can streamline financial reporting by consolidating the branch’s income with the parent company’s tax filings, reducing paperwork and accounting complexity.

A branch also provides greater operational flexibility because decisions can be made directly by the parent company without additional board approvals or legal formalities. This is particularly beneficial for service-based industries, where centralized control keeps operations running more smoothly.

From a tax perspective, branches can be advantageous because they allow companies to offset losses against the parent company’s profits. If your branch operates at a loss, those losses can often be deducted from the parent company’s taxable income, which lowers the overall tax burden.

Disadvantages of a Branch

The biggest downside of operating as a branch is legal liability. Because a branch is an extension of the parent company, the parent assumes full responsibility for debts, lawsuits, and financial obligations. If a branch faces legal action, creditors can go after the parent company’s assets, increasing financial risk.

In addition, some countries impose higher tax rates or restrictions on foreign branches, making them less tax-efficient than subsidiaries. Branches may also have limited credibility with local customers, suppliers, and financial institutions, as they are not considered independent entities.

What Is a Subsidiary?

A subsidiary is a legally separate business entity that is owned or controlled by the parent company. Unlike a branch, a subsidiary has its own legal identity, meaning it can enter contracts, own assets, and take on liabilities independently from the parent company.

Subsidiaries can be wholly owned, where the parent company holds 100% of the shares, or partially owned, where outside investors or partners hold a minority stake. This structure is commonly used by multinational corporations, holding companies, and businesses looking to expand internationally. 

How Do You Set Up a Subsidiary?  

While setting up a subsidiary involves more legal and financial steps than establishing a branch, it offers long-term benefits in terms of taxation, risk management, and operational flexibility. Below is a general guide to setting up a subsidiary for your company, whether in the U.S. or internationally.  

Choose the Best Business Structure for Your Subsidiary  

A subsidiary can be structured in different ways depending on ownership goals, tax strategy, and local legal requirements. The most common structures include:  

• Limited Liability Company (LLC): An LLC offers flexibility in taxation and limited liability for the parent company. This is a popular choice for U.S. subsidiaries.  
• Corporation (C-Corp or S-Corp): Corporations provide separate taxation and the ability to issue shares. This structure is often used for larger subsidiaries that plan to raise capital or operate independently.  
• Private Limited Company (Ltd.): Common for foreign subsidiaries, this structure provides corporate separation and liability protection in many countries.  

Register the Subsidiary as a Legal Entity  

Since a subsidiary is a separate legal entity, it must be officially registered in the jurisdiction where it will operate. The registration process varies based on whether the subsidiary is in another U.S. state or a foreign country.  

To set up a subsidiary in the U.S.:  

• Choose a state of incorporation based on tax benefits and regulatory environment. States like Delaware, Wyoming, and Nevada offer business-friendly laws for subsidiaries.  
• File the Articles of Incorporation (for a corporation) or Articles of Organization (for an LLC) with the Secretary of State in the chosen state.  
• Assign a registered agent to handle legal documents on behalf of the subsidiary.  
• Obtain a Certificate of Authority to conduct business if operating in multiple states.  

To set up a subsidiary internationally: 

• Register the subsidiary with the local business registry in the target country.  
• Comply with foreign ownership laws, as some countries restrict 100% foreign-owned entities.  
• Ensure the subsidiary meets minimum capital requirements, which vary by country.  
• Appoint a local director or legal representative if required by local regulations.  

Obtain an Employer Identification Number (EIN) and Tax Registrations  

A subsidiary must have its own Employer Identification Number (EIN) for tax purposes. In the U.S., businesses can obtain an EIN from the IRS online. This number is necessary for filing taxes, hiring employees, and opening a business bank account.  

In foreign jurisdictions, tax registration varies by country. Businesses must:  

• Register for corporate income tax, VAT, or sales tax with the local tax authority.  
• Understand tax treaties and foreign tax credits to avoid double taxation.  
• Determine if transfer pricing regulations apply to transactions between the parent company and the subsidiary.  

Open a Business Bank Account  

A subsidiary needs a separate business bank account to handle its financial operations. Most banks require:  

• Proof of business registration (Articles of Incorporation or equivalent).  
• A copy of the parent company’s formation documents.  
• An EIN or equivalent tax identification number.  
• A board resolution authorizing specific individuals to open and manage the account.  

For international subsidiaries, companies may also need to comply with foreign exchange laws and local banking regulations.  

Draft Corporate Governance Documents  

Since a subsidiary operates as an independent entity, it needs corporate governance documents outlining its structure and management. These documents include:  

• Operating Agreement (for an LLC): Defines ownership percentages, management responsibilities, and profit distribution.  
• Bylaws (for a Corporation): Establishes the board of directors, shareholder rights, and voting procedures.  
• Shareholder Agreement: If the subsidiary has multiple investors, this agreement clarifies ownership rights and exit strategies.  

If the parent company owns 100% of the subsidiary, governance is usually simpler, but legal documents still need to reflect decision-making authority and financial oversight.  

Establish Financial and Tax Reporting Processes  

Because a subsidiary is a separate legal entity, it must maintain its own financial records, file tax returns, and comply with reporting regulations. Parent companies should:  

• Set up a separate accounting system for tracking subsidiary transactions.  
• Ensure compliance with local financial reporting standards, such as GAAP (U.S.) or IFRS (internationally).  
• Determine how profits will be repatriated back to the parent company while minimizing tax liabilities.  

For international subsidiaries, businesses must also follow transfer pricing rules, ensuring that transactions between the parent company and subsidiary are conducted at fair market value to avoid tax penalties.  

Advantages of a Subsidiary

One of the key advantages of forming a subsidiary is limited liability. Since a subsidiary is a separate legal entity, the parent company is generally not responsible for its debts, lawsuits, or financial losses. This provides a layer of protection that reduces legal and financial risk for the parent company.

Subsidiaries also offer greater tax flexibility. Many countries and U.S. states provide tax incentives, deductions, or lower corporate tax rates for local subsidiaries, making them a cost-effective expansion strategy. In some cases, subsidiaries can qualify for local government grants, subsidies, or incentives, further reducing operating costs.

In addition, subsidiaries can build stronger credibility and local market presence. Because they operate as independent entities, they can establish their own branding, secure local financing, and form business relationships without the perception of being a foreign extension of a parent company.

Disadvantages of a Subsidiary

While subsidiaries provide important benefits, they also come with higher administrative and compliance costs. Since they are separate legal entities, subsidiaries must file their own tax returns, maintain separate financial records, and comply with local business regulations. This can make accounting more complicated as well as increase legal costs.

Additionally, subsidiaries may have less direct control from the parent company and require the establishment of a board of directors or local management team. This can slow down decision-making and limit operational flexibility compared to a branch structure.

Overview of the Advantages and Disadvantages of Each Entity

Feature	Branch	Subsidiary
Legal Status	Not a separate entity; part of the parent company	Separate legal entity
Liability	Parent company fully liable for debts and legal issues	Liability is limited to the subsidiary
Taxation	Income is taxed as part of the parent company	Pays its own taxes based on local corporate rates
Operational Control	Fully controlled by the parent company	Parent company owns the subsidiary but may have less direct control
Compliance Requirements	Minimal reporting and regulatory requirements	Must file separate tax returns and comply with local business laws
Credibility	May be seen as a foreign extension of the parent company	Often viewed as a local business, increasing trust and market presence
Financial Reporting	Consolidated with the parent company’s accounts	Maintains separate financial statements
Market Flexibility	More difficult to secure local contracts and financing	Can enter contracts and establish partnerships independently
Setup Cost	Lower setup costs due to fewer legal requirements	Higher costs due to registration, legal fees, and operational setup
Best For	Companies looking for simplified operations and centralized management	Businesses needing liability protection and local market credibility

Which Is Right for Your Business?

The choice between a branch and a subsidiary depends on your company’s goals, risk tolerance, and tax strategy.

• A branch is ideal for businesses that want simplified operations, centralized control, and the ability to consolidate financial reporting. It works best for service-based businesses, banks, and consulting firms that operate in multiple locations but prefer to keep financial and legal oversight under the parent company.
• A subsidiary is the better choice for companies looking to limit liability, reduce tax exposure, and establish a stronger presence in a new market. It is ideal for manufacturing businesses, retail chains, and international corporations that want to separate financial risks and take advantage of local tax benefits.

Get Expert Guidance from USA Tax Gurus

Choosing between a branch and a subsidiary is a decision that affects taxation, legal liability, and operational efficiency. Making the wrong choice can lead to unnecessary tax obligations, legal complications, and missed financial opportunities, but the right one can mean greater profitability as well as a successful expansion.

At USA Tax Gurus, we specialize in business tax guidance, international tax planning, and financial compliance. Our team helps businesses like yours analyze the costs and benefits of each structure, so you can better choose the most tax-efficient and financially sound option.If you’re considering expanding within the U.S. or internationally, contact USA Tax Gurus today for a consultation. We’ll explain the different options and their tax implications, so you can better set up your business for long-term success and profitability. For more information, book a meeting with us today or call (213) 212-2210.