Expanding your business globally is an exciting opportunity for growth, but it comes with significant challenges, particularly when it comes to hiring and compliance. Companies often face a critical decision: Should they set up their own legal entity in the target country, or partner with an Employer of Record (EOR)? Each approach has its costs, complexities, and benefits. This article breaks down the financial implications of both options to help businesses make an informed decision.
What Is an Employer of Record (EOR)?
An EOR acts as the legal employer for your workforce in a foreign country. While you retain full control over day-to-day operations and employee management, the EOR handles payroll, compliance, taxes, and other administrative responsibilities. This allows businesses to hire internationally without establishing a legal entity.
What Does Setting Up a Legal Entity Involve?
Setting up a legal entity means establishing a formal business presence in a foreign country. This process includes registering your company with local authorities, complying with tax laws, and setting up banking and administrative systems.
Cost Comparison: EOR vs. Legal Entity
1. Setup Costs
- EOR: Partnering with an EOR typically requires minimal upfront investment. Most EORs charge a flat fee or a percentage of the employee’s salary for their services.
- Legal Entity: Establishing a legal entity involves significant upfront costs, including:
- Legal and consulting fees for entity registration
- Government registration fees
- Office setup costs
- Bank account opening fees
- Setting up a legal entity in a foreign country can cost between $10,000 and $20,000, depending on the jurisdiction.
2. Ongoing Costs
- EOR:
- Monthly service fees (typically tied to employee salaries)
- No additional administrative or compliance costs.
- Legal Entity:
- Payroll and tax management
- Local HR and legal teams
- Accounting and auditing services
- Office rent and utilities
- Annual operational costs for a legal entity can easily exceed $50,000, especially in highly regulated markets.
3. Compliance and Risk Management
- EOR:
- Full compliance with local labour laws handled by the EOR
- Reduced risk of penalties for misclassification or non-compliance
Read more: The Role of HR in Ensuring Statutory Compliance: How Employer of Record Services Can Help
- Legal Entity:
- Companies bear full responsibility for compliance, which requires hiring local legal and HR experts
- Non-compliance risks include fines, back taxes, and reputational damage
4. Time to Market
- EOR:
- Enables hiring in a new country within weeks, as the EOR’s infrastructure is already in place
- Legal Entity:
- Setting up a legal entity can take several months, delaying your ability to hire and operate
Key Considerations Beyond Costs
While cost is a major factor, other considerations can influence your decision:
- Scalability: EORs offer flexibility to expand or downsize your workforce without the commitment of maintaining a legal entity.
- Strategic Goals: If long-term investment in a specific country is part of your strategy, setting up a legal entity may be worthwhile.
- Operational Complexity: An EOR minimises administrative burdens, allowing you to focus on core business activities.
Read more: Top 7 Ways an Employer of Record (EOR) Service Provider Can Protect Clients from Legal Risks
Case Study: EOR vs. Legal Entity
A U.S.-based software company wanted to expand into Brazil. Setting up a legal entity would have taken six months and cost $50,000 in setup fees alone. By partnering with an EOR, the company started hiring within three weeks at a fraction of the cost. The EOR handled payroll, tax compliance, and benefits, enabling the company to focus on its market entry strategy.
Conclusion: The EOR Advantage
For most businesses expanding globally, partnering with an Employer of Record offers a faster, more cost-effective, and lower-risk solution compared to setting up a legal entity. An EOR allows you to test new markets, access global talent, and ensure compliance without the complexities of managing a foreign entity.
If you’re considering global expansion, let us handle the complexities for you. As a trusted Employer of Record service provider, we streamline international hiring and compliance, allowing you to focus on growth. Contact us today to learn how we can support your expansion goals. Check our services here or book a free consultation now.
Image by Mohamed Hassan from Pixabay
