Key Takeaways
- Whether to work with an Employer of Record (EOR) service or establish a legal entity is a key decision for businesses expanding internationally.
- EOR solutions are usually cheaper, faster, and ensure full compliance with local labor laws. On the other hand, local legal entities allow full business operations in the country of expansion as well as full control of your employees.
- Determining long-term goals and strategy is key to understanding the right option.
Choosing between using Employer of Record (EOR) services and establishing a legal entity is a critical decision for companies expanding internationally. Each option offers distinct advantages and challenges depending on the company’s growth strategy and operational needs.
How to Hire Globally through an Employer of Record or a Legal Entity
1. The Employer of Record (EOR) Option
Hiring through an Employer of Record (EOR) involves partnering with a third-party organization that acts as the legal employer for your international employees. The EOR handles all administrative and compliance-related responsibilities, such as employment contracts, payroll processing, tax deductions, and adherence to local labor laws. Your company directs the employees’ day-to-day work and retains control over their tasks and performance. This arrangement allows you to hire workers in a foreign country without establishing your own legal entity there, simplifying the process and ensuring compliance with local regulations.
2. The Legal Entity Option
Establishing a local legal entity means setting up your own official business presence in the foreign country where you intend to hire employees. This process requires registering your company with local authorities, which may involve choosing a suitable business structure (such as a subsidiary or branch office), obtaining necessary licenses, and fulfilling capital requirements. Once the entity is established, you can hire employees directly, manage payroll and taxes internally, and fully control all aspects of employment and business operations. This option provides complete autonomy over your international activities but involves navigating the complexities of local laws, regulations, and administrative procedures
EOR vs Legal Entity: Comparative Breakdown
Benefits of Employer of Record over Owned Legal Entity
Choosing to use an EOR service when expanding into a new territory comes with several benefits. These include gaining quick access to a new market within the targeted region, the simplification of all HR and legal compliance management, and a flexible arrangement for scaling operations depending on evolving business needs.
1. Employer of Record means quick market entry
Establishing a legal entity in a foreign territory can be costly, time-consuming, and come with some risks. While many countries have worked hard to streamline the process of registering an entity within their borders, even for foreign investors, it can still take several months, or sometimes years, for many of these processes to be completed.
By contrast, working with an EOR can allow a business to begin hiring within weeks, perhaps even days. This is a huge benefit for businesses seeking to react quickly to emerging market opportunities or those wishing to test the water before making more long-term commitments.
2. Employer of Record Saves Money
An Employer of Record (EOR) is more cost-effective than setting up your own legal entity because it eliminates the substantial upfront and ongoing expenses associated with establishing and maintaining a foreign subsidiary. Creating a legal entity involves costs such as legal fees for company registration, obtaining licenses and permits, setting up a physical office space, and hiring local administrative staff. There may also be compulsory capital requirements, such as the minimum €25,000 capital in Germany. Additionally, you must invest in understanding and continuously complying with local laws and regulations, which may require ongoing legal and accounting services. These expenses can be significant, especially if you are entering multiple new markets or are uncertain about the long-term viability of your operations in the foreign country.
In contrast, using an EOR allows you to leverage the existing infrastructure of a third-party organization that is already compliant with local employment laws. The EOR handles all administrative and legal responsibilities related to employment, such as payroll processing, tax withholding, benefits administration, and regulatory compliance. You pay a service fee to the EOR, which is typically much lower than the cumulative costs of setting up and running your own entity. This arrangement not only reduces financial outlay but also minimizes risk and administrative burden, enabling you to allocate resources more efficiently and focus on core business activities.
For a full breakdown of the cost of Employer of Record services, check out our EOR pricing guide, here.
3. Employer of Record simplifies compliance
Another benefit of using an EOR over establishing an independent local entity is the outsourcing of both HR management and liability for compliance with local labor laws.
In most circumstances, an EOR will shoulder responsibility for adhering to employment regulations, meeting required operational standards, fulfilling tax regulations, and administering benefits. This is useful for expanding businesses as it helps reduce exposure to risk, lower the number of resources that must be dedicated to the task, and simplify the process of understanding and following the different rules and expectations of each territory.
4. Employer of Record supports scaling
Working with an EOR service is an excellent way to retain flexibility of operations. Once a business establishes a legal entity in a territory, it is bound by the requirements and responsibilities of keeping that fully staffed and financially viable.
A legal entity is a long-term commitment that comes with financial investment and, often, a physical presence. This can make reacting to changing markets and opportunities a more labored process. When working with an EOR, scaling a workforce up or down can be done quickly and with minimum external concerns, legal risks, or financial obligations.
It’s also far easier to end an EOR operation than to wind up and liquidate a local entity.
Benefits of a Legal Entity over Employer of Record
Usually taking the form of a subsidiary, such as a limited liability company, or a branch office of a parent company, establishing a legal entity is an alternate option to working with an EOR.
As this is a more complex and permanent arrangement, it is often favored by businesses with long-term strategic goals in a specific territory.
The benefits of establishing a legal entity include keeping full control of business operations, creating a stronger brand presence, and building more complete long-term relationships.
1. Local Entities Mean Better Oversight and control
Outsourcing human resources operations is often listed as one of the advantages of working with an EOR for global expansion, and in many cases, it is. For some businesses, however, it is considered more beneficial to maintain complete control of all business operations. By directly managing its own human resources and payroll, a company can easily implement consistent practices and business cultures across all its operations, regardless of geographical location.
Working independently of an EOR also allows a business to assume full responsibility for legal compliance and remain confident this task is performed completely in all areas. Over-reliance on a third party to fulfill essential duties, including managing legal compliance, can leave a business exposed should the third party fail.
Outsourcing of this kind can also restrict a business’s ability to make quick decisions and react to situations as it deems appropriate without first going through a consultation process to ensure all stakeholders agree.
2. Enhanced Local Market Presence Through a Legal Entity
The second benefit of establishing a legal identity is that it allows a business to become a stronger presence in the local market. While working with an EOR allows a company to hire a workforce and carry out operations within a country, it is not considered a permanent and committed entry into the region.
A local entity, on the other hand, is valued much more in line with local businesses and is often seen as more credible by customers, suppliers, and business partners alike. This credibility, when combined with a physical local presence, fosters stronger and more long-term relationships as the business becomes increasingly integrated into the community.
Knowing a company is committed to the market for the medium and long term creates confidence and invites collaborations. In general, establishing a local entity opens doors to more opportunities within the local business world.
3. Hiring through a local entity can mean better team engagement
This increased level of confidence and trust in a local entity can also transfer to a company’s labor force. By forming direct relationships rather than working through an intermediary, workers are more likely to develop a greater affinity for the business that employs them. This generates benefits such as loyalty, retention, commitment, and the ability to attract higher-caliber talent.
Avoiding EOR fees also opens the door to more competitive or tailored compensation packages and the ability to offer more attractive career progression pathways.
4. A Local Entity Can Be Cheaper at Scale
When expanding internationally, choosing between an Employer of Record (EOR) and establishing a local entity often depends on cost-effectiveness at scale. An EOR enables quick, compliant hiring without setting up an entity, but per-employee service fees can add up as your workforce grows. For companies planning to hire many employees or operate long-term abroad, these recurring costs may eventually exceed the expenses of establishing and maintaining a local entity.
By setting up your own legal entity, you can achieve economies of scale that lower per-employee costs over time. Fixed costs like legal registration and administrative setup become more economical when spread across a larger staff. Managing HR internally allows greater control over payroll, benefits, and compliance expenses. You can also negotiate directly with local vendors for better rates than those available through an EOR. In the long run, owning a local entity can be more cost-effective for substantial and sustained international operations.
5. A Local Entity Means Fewer Restrictions than Employer of Record
Establishing a local legal entity offers greater flexibility and fewer restrictions compared to hiring through an EOR, especially concerning employment laws that govern EOR arrangements. Some countries impose limits on the duration and conditions of hiring via third parties. For example, in Germany, the Labor Leasing Act ( Arbeitnehmerüberlassungsgesetz (AÜG)) restricts the use of leased/EOR employees to a maximum of 18 consecutive months with the same client company. After this period, the worker must be offered a permanent position directly or released from their assignment.
These restrictions don’t apply when you hire employees directly through your own local entity. With a legal presence, you can enter into standard employment contracts without limitations imposed on agency workers. This enables you to build a stable, long-term workforce and foster stronger employer-employee relationships. You can implement your own HR policies, offer comprehensive benefits, and create career development paths aligned with your organizational goals. Direct hiring minimizes legal ambiguities and reduces reliance on third-party compliance, giving you greater control over adherence to local labor laws and regulations.
The Challenges of Employer of Record and Legal Entity Compared
While both working with an EOR service and establishing a legal entity come with their own advantages, each also has its own distinct challenges.
- For an EOR, these are centered around limitations on control.
- For legal entities, it is the higher costs and complexity which are often seen as the chief disadvantages.
Each option also has differences in scalability and how they can be aligned with long-term strategies.
1. Balancing Control with EOR Services
Once engaged, an EOR service acts as a legal employer and complete human resources outsourcing solution. While this is desirable in some situations, it does require client businesses to surrender significant levels of control over their daily operations. The EOR is usually authorized to make key decisions about vital operations, including hiring, payroll, and legal compliance.
While the client company can still provide input, it must rely on the EOR to actually carry out the tasks. This lack of direct involvement can be challenging for many companies.
Working with any third party also comes with the risk of encountering clashes in opinion or policy when it comes to values, goals, or culture. Any business considering working with an EOR for its international expansion should seriously consider how it will manage these factors in the short, medium, and long term.
2. Challenges of Establishing a Legal Entity
On the other hand, establishing a legal entity is time-consuming, complicated, and, in many cases, can incur significant upfront costs.
The process of registering an entity, whether a subsidiary or a branch, can involve a great deal of administration. This includes submitting applications, securing licenses and permits, proving capital, and even appointing local directors. In addition, any business looking to establish an entity is likely to have to set up a physical local office and employ its own local workforce, all while remaining compliant with local laws and regulations.
Once all this is achieved and the entity is up and running, it must then be managed independently and without assistance for the duration of its life span. This can prove particularly challenging for smaller or more inexperienced companies with limited resources.
3. Finding the Right Balance Between EOR and Legal Entity Options
Perhaps the most important consideration any business should make when choosing between working with an EOR service or establishing a legal entity is how the choice will align with the company’s long-term goals.
Expanding into a territory in partnership with an EOR is quicker and more simple but may only be suitable while the business interests are in the early stages. As it grows larger and becomes more established, a company may find working with an EOR to be restrictive.
In contrast, establishing a permanent legal entity in a new territory can be extremely challenging for small or young businesses that require the flexibility to adapt quickly and find their place within the local market.
What is right for a business at the start of its expansion journey may not be the best option further down the line. Balancing evolving business needs to find the best solution at all stages is a key challenge.
Summary Table: EOR vs Legal Entity Set Up
| Feature | EOR | Legal Entity Set Up |
| Price | Usually more cost-effective, as no legal fees or minimum capital requirements. | Usually more expensive, but can be cheaper if hiring large numbers. |
| Compliance | Employer of Record has complete responsibility for payroll and HR compliance, reducing the liability for your company. | Your company fully responsible for employment law compliance. |
| Speed to Market | Employer of Record solution can be operational in as little as 12 hours. | Usually takes weeks or months, depending on the location. |
| Multi-country Flexibility | Most Employers of Record operate in 100+ countries, making it easy to scale your enterprise in a new location with the same EOR company and one invoice. | Requires setting up a new legal entity in each location of hire, even if only one employee in place. |
| Employee Experience | Employer of Record companies are payroll and compliance specialists, so can usually deal with any issues that arise promptly. However, it may mean the employee has to deal with multiple parties. | Local entity may not have fully staffed expertise of EOR provider to deal with payroll errors, for example. However, there may be less friction in responding to issues with no intermediary involved. |
| Flexibility | In some countries there are employment term limits (e.g., Germany) when using an EOR. Activities of your employees may also be restricted when operating through an EOR. For example, EOR employees may not be able to sign contracts in the name of your company. | Unrestricted employment capabilities. Employees also have more freedom to act in the name of the company in that country. |
How to Make the EOR vs Legal Entity Decision
The decision of whether to enter an agreement with an EOR service or begin the process of establishing a local entity will depend on several factors. These include:
1. Consider market entry strategy and long-term goals.
As discussed above, understanding the best option for the company’s long-term goals is crucial. If all a business wishes to do is test the market or take advantage of a short-term opportunity, then quick entry to the territory via an EOR may be the best option.
If the objective is establishing a long-term presence, building brand awareness, and growing into a significant player within the market, then creating a local entity may be the better path to take.
2. Look at the Complexity of the Target Market
Another factor to consider carefully is the complexity of the regulatory environment in the target region. One of the prime benefits of an EOR over a legal entity is the ability to bypass registration processes and outsource liability for legal compliance. This is naturally more advantageous in a complicated, ambiguous, or heavily regulated environment than it is in a welcoming, liberal, and simple one.
3. Compare the Cost of EOR and Entity Set Up
Beyond the regulations, the cost of establishing a local entity in each region of the world will be different, as will the costs of working with an EOR service. While the second is usually lower in the short term, ongoing fees can mount over time.
Weighing the short-, medium-, and long-term costs of both services against each other and against the potential return on investment the client company can expect from using them is a crucial consideration.
Assessing the exact expected costs, timeframe, legal risks, and resource requirements of establishing the chosen local entity in the specific territory, as opposed to the potential benefits of a committed operation in that market, will play a major role in deciding whether a legal entity is the right path for a particular region and time, or whether working with an EOR service would be more prudent.
EOR vs Legal Entity: Choose Carefully
When expanding internationally, the choice between using an EOR service or establishing a legal entity is an important one. Each option comes with its own benefits and challenges, and the right fit will be different for every company at each stage of its development.
A business must decide between quick and straightforward entry into a market with a high level of flexibility or a more committed approach with greater long-term prospects and the ability to maintain control over operations.
The right choice will depend on the market itself, how it is regulated, the costs and potential returns, and the needs of the individual business.
For more information, get in touch with Remote People’s expert EOR broker service.
FAQ
What are the key factors to consider when deciding between EOR services and establishing a legal entity?
Business requirements, costs versus potential benefits, and long-term strategy should all be considered when deciding between EOR services and establishing a legal entity. What resources are available, what values are most important to the business, and the purpose of expansion are all important details likely to impact the success of each choice.
Every business will have different needs at different times, and it is important to understand and assess all options fully before making a commitment.
How do the costs and benefits of EOR compare to setting up a local entity?
In the short term, working with an EOR is likely to yield benefits much faster and at a lower up-front cost. In the long-term, however, the potential return from working with an EOR is limited while the costs will continue to mount.
Establishing a local entity may cost more and take longer to begin with, but once the business is up and running the extent of control and potential benefits are often much higher.
Author: Marcel Deer
Marcel is an experienced journalist and Public Relations expert with an honours degree in Journalism and bylines with a range of major brands.
