A legal entity in a new country is not an asset, it’s a liability. In fact, 99% of new legal entities within FinTech corporate structures that I see are not needed, will never create new opportunities, and will likely hurt the growth capacity of that organization.

So, if you want to create new business opportunities and reach new regions, the creation of a new legal entity in a new country is a slow boat to China.

What are the most common misconceptions leading many FinTech founders into believing that new legal entities are a good idea?

• A partner or a bank says it would be easier to work with you if you have a local entity.
• You found a team member and you think in order to pay them and employ them, you need a local entity.
• Some opportunistic lawyers or consultants tell you that your current structure is illegal and you absolutely must create a local entity to do what you do.
• Your current business lost a partner or your current license application is slower than you hoped for and you want to create a backup in a new country, expecting it to be easier and faster.
• Your competitor just opened their new office in a country X and you feel you absolutely need to make it even.

Most of the reasons above feel quite compelling, however, the issues they are trying to address can be addressed in a variety of other ways, without the negative consequences, costs, and limitations that you will face when you actually have a legal entity.

Look at how many Big Tech and established FinTech companies grow globally: they only have 1-3 entities globally during their first 10 years in business, and they delay the creation of any subsequent entities until they actually have developed a profitable local business from the parent location on the cross-border basis.

One of the reasons, in my opinion, why the creation of a legal entity feels like an easy no-brainer decision is that most FinTech founders don’t recognize that having a legal entity in a particular country not only requires maintenance in terms of reporting, corporate filings, and other admin efforts, but actually, it can dramatically hurt your growth, because:

• Having an entity in most countries can prevent you from offering your existing services in this country;
• Even if the local entity is not regulated, it becomes a target for regulatory scrutiny and will trigger you to maintain government affairs, tax planning, and other efforts;
• It dilutes management attention and focuses because instead of solving strategic questions related to growth, product development, or innovation, the whole executive team will be dragged into following up with local consultants, signing corporate tax filings, tracing missed invoices, or lost payments, and responding to minor regulatory inquiries.

There is a reason why successful companies only create legal entities when they already have a local business and not as an attempt to build a future local business. This reason is simple: if you cannot find a way to build momentum in a particular country without the local entity, you don’t have a strong business case there and you have not tested the market. And if you don’t have a strong business case, having a legal entity is going to be a liability anyway you look at it. 👀

So, if your FinTech group is currently considering creating a new legal entity in a country where you don’t have a solid revenue base, please, stop before it’s too late. Seriously – send me an email or DM and you can thank me later!

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