EOR services or own legal entity: Which one is for me?

Expanding internationally, embracing remote work, or encountering skill shortages in your home country—these are just a few reasons why businesses may need to hire international employees. There are two main approaches to hiring abroad: setting up a legal entity and utilizing an Employer of Record (EOR). But how do you decide which option is right for you? This article will explore the basics of EOR and legal entity set-up, discuss their benefits and drawbacks, and provide guidance on when to use each option.

An Employer of Record enables businesses to hire employees abroad without establishing a legal entity in the target market. The EOR becomes the legal employer, assuming full liability and handling various responsibilities, including:

1. Compliance: Ensuring compliance with local labor laws, regulations, and employment contracts.

2. Payroll and taxes: Handling tax registration, withholdings, deductions, and payments.

3. Local benefit administration: Offering compliant benefit packages, registering with pension funds, and providing health insurance.

4. Termination: Managing the separation process according to local standards.

Employer of Record is a quick and cost-effective solution for expanding businesses to explore new markets without immediate commitment. However, it may have limitations, requiring businesses to establish their own legal entity in some cases.

Establishing a legal entity is the conventional approach to hiring employees in new markets. The common types of legal entities include subsidiaries, branch offices, and representative offices:

1. Subsidiary: A fully operational, partly owned entity independent from the parent company, offering protection from legal liabilities triggered by the subsidiary.

2. Branch office: A foreign office of the organization conducting business in another market without a separate legal entity, making the parent organization fully liable.

3. Representative office: A minimal presence in a country for non-commercial activities related to representation.

To make an informed decision between Employer of Record and legal entity set-up, businesses should consider the benefits and drawbacks of each approach:

Benefits of Employer of Record:

• Time and cost savings by avoiding incorporation.

• No concerns about compliance, labor laws, payroll, taxes, or benefits administration.

• Fast onboarding and more resources to focus on core business activities.

• Flexibility and an easy exit option when testing new markets.

• Local expertise and ongoing compliance support.

• Simultaneous expansion into multiple markets.

Drawbacks of Employer of Record:

• No protection from permanent establishment (PE) risk.

• Coordination and management of multiple EOR partners.

• Extensive research required to choose a reliable provider.

• Time limits imposed by certain countries.

• Limited number of employees due to PE risk.

• Potential impact on employee perception and belonging.

Benefits of Setting up a Legal Entity:

• Full operational capabilities in the market.

• Engaging in any business activities without triggering unwanted tax liabilities.

• Legal clarity and increased visibility.

• No monthly service fees to external third-party providers.

Drawbacks of Setting up a Legal Entity:

• Requires significant time, resources, and a complex incorporation process.

• Involves substantial upfront investments and capital requirements.

• Requires in-depth knowledge of local laws and regulations.

• Entire legal liability falls on the expanding business.

There is no definitive answer as to which option is superior since the choice depends on individual circumstances. However, here are some guiding points:

Employer of Record is suitable when:

• Testing a new market before full commitment.

• Needing quick market entry.

• Bridging the gap between entering a market and establishing a fully operational entity.

• Recruiting specific talent unavailable in the home market.

• Scaling a global team across different locations.

Setting up a legal entity is recommended when:

• Seeking full access to new markets.

• Enhancing business growth and brand recognition.

• Establishing cost-effective production.

• Competing in the new market.

Apart from the general use cases, consider the following questions to help determine the right path for your business:

1. Is the presence in the market temporary or a long-term project?

2. How many employees will be needed?

3. Is an office necessary for client and partner interactions?

4. How many markets are in the expansion roadmap?

5. Which activities will the organization and employees engage in?

6. Is the business ready to fully commit to the new market(s)?

7. Does the organization possess knowledge of local labor laws and compliance?

8. Are qualified executives available to act as local directors if required?

9. Is time of the essence to keep up with competitors?

Choosing between Employer of Record and legal entity set-up depends on various factors, including the scale and timeline of the expansion project and the business's knowledge of local legal landscapes. Each approach has its benefits and drawbacks, and businesses should carefully assess their specific needs and circumstances before making a decision. Seeking expert advice can also help ensure a successful global expansion strategy aligned with your business goals.