EOR vs. Setting Up Your Own Entity: A Cost-Benefit Analysis

As technology evolves, businesses expand globally. However, this is making businesses wonder if they should partner with an employer of record (EOR) or set up their legal entity in a new country. Both options accompany a set of benefits, risks, and cost implications.

In this article, we have broken down the pros and cons of each of the approaches to help business owners make a strategic, cost-effective decision to expand their services globally.

IMAGE: PEXELS

What Is An Employer Of Record (EOR)?

An employer of record, or EOR, is a third-party organization that legally employs workers on behalf of a business in a foreign country. While the core team takes care of the day-to-day management, the EOR handles everything ranging from payroll, benefits, and taxes to compliance with the local labor laws. To sum it up, international employer of record services cover the following:

The onboarding and employment paperwork which are compliant with the local labor laws.
The end-to-end payroll process is done in local currency with the stipulated tax deductions.
The statutory benefits and contributions include social security, insurance, and pensions.
Tax withholding and filing process
Employee termination and offboarding process

The required compliance with the local labor laws.

What Does Setting Up A Legal Entity Involve?

Setting up a local entity involves the business registering its legal business structure, which includes a subsidiary or branch office in the target country. This allows the business to hire talent directly, manage the payroll in-house, and have a permanent operational footprint in the market of their niche.

When To Choose An EOR

Businesses can choose an EOR in the following situations:

They want to test a new market without committing to heavy financial requirements.
They want to hire as soon as possible, without waiting for months for incorporation.
They want to avoid regulatory pitfalls in unfamiliar jurisdictions.
They want to hire and manage high-performance teams remotely

When To Set Up A Legal Entity

Businesses can set up a legal entity in the following situations:

They have a long-term plan to operate in the market.
They need to have full control over their branding, operations, or procurement within the country.
They are planning to hire dozens or hundreds of employees locally.
They have to provide custom employee benefits or tax structures that an EOR cannot provide.

Cost Analysis: EOR vs Setting Up Your Entity

Many businesses often wonder, “How much does an employer of record cost?”

The cost analysis of EOR is as follows:

Low upfront investment: Businesses would not be required to pay incorporation or local registration fees.
Quick setup: With the EOR set-up, businesses onboard employees within 1-2 weeks.
Monthly service fees: EORs typically charge around 10-15% of the employee’s salary.
Simple payroll and benefits: Usually, EOR manages the salary, taxes, deductions, and local compliance.
Minimal compliance risk: EOR will also be responsible for legal, tax, and employment regulations.
No internal HR or legal overhead: All the admin work of the business is outsourced to the EOR.
Flexible and scalable: EOR is ideal for hiring across multiple countries or for short-term expansion.
Easy exit: Businesses can end contracts without any complex legal dissolution.
Higher long-term cost per hire: Due to the service fees, EOR is best suited for testing new markets, scaling in phases, and avoiding legal liabilities.

Setting Up Your Entity

The cost analysis of setting up your entity in a foreign land includes:

Higher initial costs: Businesses would have to pay legal fees, taxes, and government filings.
Long duration of set-up time: Business will typically require 3 to 6 plus months to become completely operational.
In-house admin costs: When setting up your own entity, businesses will need payroll systems, HR staff, legal advisors, and accountants.
Provide custom HR and benefits: Businesses will have full control over compensation structures and their internal policies.
End-to-end compliance responsibility: The Business will be liable for legal missteps, employee misclassification, legal issues, etc.
Difficult exit: Winding down operations will involve legal and financial procedures.
Cost-efficient at scale: Businesses will become more economical over time with 10-plus employees in one country.
Elevated control: Businesses will directly manage workforce, branding, and local operations.

Conclusion

Both the models, EOR and setting up your own entity, offer viable paths for businesses that want to expand internationally. The best choice would depend on the business goals, budget, risk tolerance, and hiring scale.

An EOR will offer unmatched speed and simplicity while also establishing a local entity that gives businesses full control and long-term cost advantages at scale.