Employer of Record (EOR) vs. Legal Entity Establishment: How to Decide and What Companies Get Wrong

Key takeaways

• After EOR vs legal entity setup costs have been determined, there are several factors for organizations to consider when picking a compliant employment method for international workers.
• An EOR might be a better fit for your organization if your priorities include speed to market, low upfront investment, and guaranteed compliance.
• Setting up a legal entity might be a better solution if your organization aims for a more long-term or established presence in a market.
• As a provider of both EOR and legal entity solutions, Safeguard Global provides unbiased, expert guidance on which employment method(s) might best suit your needs.

Legal entity setup vs. partnering with an EOR

If you’re considering employment options for your global workforce, you’re likely to have encountered both employer of record (EOR) and entity setup as ways to hire international employees in full legal compliance. But it can be hard to get unbiased advice on which solution might be best for your business, because most partner companies offer either EOR or entity setup services and are invested in selling you the solution they provide. However, at Safeguard Global, we offer a variety of workforce enablement solutions and help customers understand which solution (or combination of solutions) might be best for them. This could include EOR, entity setup and management, outsourced HR, or whatever else a business needs throughout its entire lifecycle.

Many organizations — like the ones using our EOR vs entity setup cost calculator — begin the decision-making process by looking at raw figures. But after that, the process becomes much more nuanced. In addition to cost, organizations need to examine their timeframe, type of business activity, goals for expansion, and other factors to determine whether an EOR or entity setup solution might best fit their needs. Here’s how we help our customers decide and what many organizations get wrong.

When EOR is typically a better fit

EORs, which use already-established entities to employ workers on your behalf, can have huge advantages when you need to quickly hire in a new country. When companies are prioritizing speed, they often find themselves choosing EOR. In general, hiring through an EOR also requires less up-front investment. Therefore, EOR is often a good fit for organizations that are testing a new market or expect only a temporary presence in a new country. EORs allow them to avoid the setup time and capital of entity setup and provide needed HR infrastructure like country-specific employment contract templates, a payroll system, and local reps to handle employee questions and concerns. EORs allow these organizations to get their workers on the ground and up and running quickly, sometimes in as little as two weeks.

Not having to worry about compliance is another compelling reason many organizations choose EOR. “After considering the tangibles like cost and speed to market, many organizations turn to the intangibles,” says Wanda Prewitt, Safeguard Global’s chief operating officer. These intangibles include the energy saved when you don’t have to put together piecemeal solutions, access to experienced professionals who are familiar with your country of expansion, and the peace of mind that compliance is taken care of.

“We have more than 400 experts around the world who not only support hired employees but also the hiring companies, whether that’s answering team-specific questions, being a source of knowledge about hiring trends in target countries, or keeping them informed about new regulations that may affect employment relationships,” notes Prewitt. “And we’ve recently added global recruiting to our EOR solution, allowing us to offer even more value to customers looking for top talent from around the world.”

When a legal entity is typically a better fit

While EOR is often the choice for companies that need a short-term or flexible presence in a new country, establishing a legal entity is often the course of action for organizations that are making a more long-term or involved commitment to the market. For instance, we always recommend legal entity establishment for our customers who are doing regulated or licensed work that requires direct employer status.

Companies also opt to establish their own entity when they need a local presence in order to attain a specific accreditation, obtain local contracts, or have deeper control over their workforce. In some countries, having their own legal entities has also benefitted our customers by helping simplify their taxes or providing more intellectual property (IP) protections over employee creations.

Some of our customers transition from an EOR to their own entity when their workforce grows or their presence in a country becomes more sustained. When working with larger teams, paying your workforce through your own entity rather than through an EOR (which usually charges a per-employee fee) often becomes more cost-effective.

Having a large number of workers in a country for a long time can also lead to permanent establishment risk, which can cause our customers to consider entity establishment. “One of the best things about offering a full suite of solutions is that we can advise customers on what’s best for them in that moment and help them transition to a new solution,” says Prewitt. “We’re proud to be one of the only EOR providers who can advise you to set up your own entity, help you establish it, and then seamlessly transfer your workers to your entity. After that, we continue to be there for our customers through our entity management offering, taking care of ongoing operational requirements like tax filings, statutory compliance management, and up-to-date registrations.”

Thinking through the implications of EOR vs. legal entity setup

If you’re working through whether using an EOR or setting up your own legal entity is right for your business, what questions should your organization be asking? With the above considerations in mind, here’s a quick list to help you simplify your decision:

What’s your timeline to hire? If you need to be operational quickly (a month or less), an EOR can provide the required speed to market.

What type of work will your team be doing? Do you need local contracts, bank accounts, licenses, or invoicing abilities? A legal entity might be needed.

How long do you expect to operate in the market? If you aren’t sure how long you’ll be operating in your new country or expect to only be in the market short-term, an EOR is likely to be an attractive solution for you. If you’re planning a more permanent expansion into a country, a legal entity may be needed. If you plan a long-term presence but still need speed to market, partnering with Safeguard Global allows you to start with an EOR solution while we work with you to set up your own entity.

How many people will you hire? Some companies find that for large numbers of employees, having their own legal entity can be more cost effective or is required by law in the country they’re operating in, due to permanent establishment considerations.

Is your team equipped to handle the administrative burden? If you’re unfamiliar with employment and taxation laws in the country you’re expanding into, you don’t have a payroll provider set up, or you are expanding into multiple countries at once, partnering with an EOR can be a cost-effective way to ease the administrative burden while gaining peace of mind that compliance is taken care of.

What is the cost breakdown of hiring through an EOR vs. establishing a legal entity? For a closer look at how the cost of EOR vs. the cost of legal entity setup might impact your budget, consult our EOR vs. entity cost calculator, which allows you to select a country and the number of employees you’re looking to hire and compare the costs side by side.

What many companies get wrong about the EOR vs. legal entity decision

We’ve been helping companies navigate international employment for more than 17 years, so we’ve seen inside the international hiring process at non-profits, corporations, and everything in between. Here are some mistakes you’ll want to avoid:

• Underestimating time to operational readiness: After entity registration, many steps are still needed before you’re operational. An EOR eliminates the need for these steps, allowing you to employ workers without a establishing a legal entity or as an interim solution while you are waiting for your legal entity to become operational.
• Underestimating the administrative burden: The administrative burden of maintaining an entity in another country can quickly become unmanageable for many organizations, especially if they lack in-country HR, tax, or legal expertise. Many HR processes, such as withholding taxes or onboarding employees, must be completely rewritten from scratch to accommodate local laws and customs.
• Undervaluing compliance: Not complying with labor laws can be much more serious than many businesses realize. In addition to financial penalties, companies risk damaging their reputation in a way that hinders outside investment, future business partnerships, and employee morale.
• Basing the decision solely on cost: Although many organizations may find that an EOR solution is projected to be less expensive, a legal entity is likely the only viable option for organizations that need to sign contracts, invoice other businesses, or create intellectual property.
• Believing that EOR is only for temporary or small teams: Although organizations with a long-term presence or larger in-country workforce often establish their own entity, not all do. Especially because of the HR and compliance burden of employing through their own entity, our customers sometimes opt for EOR as a more long-term solution, and some even find it costs less money overall.
• Believing that entity establishment is only for large or mature teams. Likewise, EOR is not always the best solution for temporary or small teams, especially those who need to sign contracts, obtain licenses for specialist industries such as healthcare, or carry out other business activities.

How Safeguard Global can help

With our full suite of solutions that make global workforce management easier no matter what your organization needs, our experts are able to give unbiased advice about how EOR and Entity Setup solutions might impact your business. We bring our nuanced, in-depth knowledge to your team’s specific challenges and partner with you to provide the agile, bespoke solutions you require in a globalized world. Get started today.