Globalization Partners

Employer of Record vs. Entity: Which Should You Choose?

by Globalization Partners
August 2020
Reading Time: 3 minutes

 

 

Taking your business global is a daunting task. The act of setting up a legal entity in another country requires a great deal of planning and has endless complexity. It’s so complex that it may lead you to consider alternatives, such as an Employer of Record (EOR).

Depending on your business’ needs and goals, there is always an option best suited to fill them. There are definite upfront difficulties involved with setting up an entity, but the ease of getting started isn’t the only factor to consider. The ongoing legal and financial commitment, including taxes, compliance, payroll – these are all important to review as well.

What Does it Mean to Set up an Entity?

A legal entity, in the form of an overseas branch or foreign subsidiary, gives your business a physical and legal presence in another country. A legal presence means that you have registered with the local authorities, have enough capital requirements to open a local bank account, and have a team of legal, HR, and financial experts that help your company ensure ongoing compliance with local laws and regulations.

What Does it Mean to Work with an Employer of Record?

With an Employer of Record, you can onboard talent without setting up a legal ent in-coityuntry. The EOR has an entity in place and serves as the legal employer, while you find, hire, and manage your employees directly. An EOR will handle payroll, taxes, and benefits, along with all HR issues.

With an Employer of Record, you can onboard talent without setting up a legal entity in-country. Click To Tweet

Think of an EOR as a partner that you are paying to absorb all the risk that you would otherwise take on with entity setup.

entity

Side-by-Side Comparison: Entity vs. EOR

FactorsEntityEmployer of Record
Your BudgetWhen taking into consideration possible expenses, you must account for the following, which are often hard to estimate: meeting capital requirements, registration fees, the cost of paying regional legal and financial experts, and payroll costs.Working with an EOR, means the costs are much clearer. You are responsible for a setup fee for each professional, a service fee based on the total salary of the professional. There are no bank account setup fees, costs for experts, or capital requirements.
BankingIn some countries, you will need to make an in-person visit to a local branch to open a bank account and meet the capital requirements.The EOR already has a local bank account through which they pay your employees.
Time and EffortDepending on the country, you can expect an average timeframe of two to six months. During this time, you will have to find regional legal, financial, and HR experts to help you navigate laws and regulations, ensuring compliance.Once you have found a professional that you want to hire, the EOR can help you onboard them in a matter of hours.
TaxesSetting up your own entity means you must know how to navigate the following tax laws and filing requirements for that specific country.Takes on the responsibilities of paying local taxes.
ComplianceYou will have to retain experts that can help you navigate and comply with local laws. It is your responsibility to stay up to date with the latest requirements to avoid penalties or charges.The risk lies entirely with the EOR. Its local experts are responsible for making sure that your company is protected and fully compliant.
Contracts, Hiring, and TerminationYour find the professionals, hire them directly, and must draft contracts that are compliant with the local labor laws.In case of termination, you will need to follow local laws to avoid negligence. Termination procedures vary greatly from country to country and wrongful terminations could put your company at risk of lawsuits.You are responsible for recruiting your candidate, deciding who to hire, managing them day-to-day and making termination decisions.However, the EOR drafts a locally compliant employment contract. Your EOR advises you on how to legally terminate and manages the entire separation process, ensuring your company follows country-specific legal termination procedures.
Navigating Cultural DifferencesTo ensure proper communication and overall effective operation, you may need to employ local experts that can help you understand the local culture and provide guidance.You can have access to local experts that have experience in-region and can help with any cultural barriers.
Benefits PackagesTo attract top talent and stay compliant with employer requirements, you will need to offer benefit packages. If you’re only hiring one or two employees in a country, this can incur a significant cost to your company.The EOR has competitive local benefit packages in place that they can offer to your professionals, all comparable to the benefits you offer to your team in the country where you are headquartered.

What Else Should You Consider?

There are even more factors to keep in mind. Ask yourself these three questions:

What Is the Scale of My Expansion Project?

If you’re only planning on hiring a small number of employees in many different countries, using an EOR to avoid setting up multiple entities is a clear benefit.

However, what if you’re only expanding to one target country? While it might make sense to set up an entity from the beginning, keep in mind that hiring employees through an EOR is a good way to get started while you begin the entity setup process. Later, you can transfer employees from the EOR to your own entity if you wish to.

Match the solution to the scale of your project, but keep in mind, only one of these options – an EOR – is dynamic and flexible.

How Willing am I to Fully Commit to a New Market?

If you’re just looking to dip your toes in a new market, an EOR can help you quickly and affordably build and test the region with a small headcount. If the expansion test doesn’t produce the results you hope for, it’s much easier to cease operations and move to the next country with an EOR versus needing to wind down your own entity.

Are You Trying to Beat Your Competition?

Let’s say that you have been planning to establish a physical presence in a new market. One day you realize that your competition has plans to beat you to that same market. Now you’re faced with the need to fast-track your project and onboard employees as soon as possible. Once again, an EOR can help you start your operations in a short time.

Keep the Research Going

Don’t let complexities hold back your company from reaching the next stage of growth. Read “How to Scale Globally Without Sinking” and get a blueprint to guide your company’s entry into the next competitive international market.

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