What’s right for my business: Setting up an entity or hiring through an EOR?
As your company expands, you may find many reasons to hire employees globally, including finding specialized talent, entering new markets, or addressing a shortage of skilled workers. When hiring an employee abroad, you have two options: setting up a legal entity or using an Employer of Record (EOR).
Deciding between the two can be challenging. But in this article, we cover the benefits of both and how each relates to onboarding, taxes, and compliance, so that you can make an informed decision that aligns with your business needs.
Setting up an entity
When expanding into new markets, the traditional method for hiring employees is to establish a legal entity in that location. However, this process can be lengthy—up to six months (if not longer).
Establishing a legal entity can also be expensive. Legal and HR teams can exhaust significant resources navigating local employment, labor, and tax laws. Then there’s the time and money spent appointing a local director, opening a local bank account, and setting up payroll, registration fees, and everything in between.
There are many different types of legal entities, such as representative offices, branch offices, and subsidiaries, and different countries may have different requirements for each. However, creating a legal entity abroad typically involves some of the following requirements:
- Choosing the correct business structure for you (e.g., most corporations aim for a private limited company)
- Registering with the local government
- Opening a bank account in-country
- Registering and setting up a tax ID to submit payroll taxes
- Appointing a local director or directors
- Identifying mandatory employee benefits to offer to new hires
- Finding a third-party service to manage payroll, taxes, and employee paperwork
Pros and cons of a legal entity
Legal entities have numerous advantages, particularly when expanding your operations to foreign countries more permanently, but there are also some downsides to taking on the work of creating a legal entity abroad.
Pros of a legal entity
Cons of a legal entity
You have total control over your employees. From onboarding to offboarding, you’ll have full control of the hiring process and your employees. Culturally, foreign employees will feel part of the company, which helps create a sense of belonging among their peers.
Expensive and time-consuming to set up. Forms, deadlines, costly fees, and long wait times—when dealing directly with local governments in foreign countries, it can take a lot of time and resources to get your legal entity up and running.
Established presence in the market. Recruitment and customer acquisition become easier if your company establishes a legal entity in another country, due to your company's permanent presence.
You’re responsible for compliance, payroll, and taxes. After creating the legal entity, you'll need to set up payroll and figure out taxes at the national and local levels, depending on where you are. It's also essential to follow employee benefits requirements and other local employment laws to avoid expensive penalties.
No service fees for EOR. EOR payment structures vary, but many require payments per employee. With your own entity, you won’t have that additional cost as you expand into different markets.
Need to understand local laws. To ensure compliance with local labor laws, your company needs a team of experts on the ground, including legal and financial professionals. Only a local expert can capture the nuanced details pertinent to the region.
More legal liability. With a legal entity, your company is liable when mistakes happen, from worker misclassification to tax penalties or missed contributions, potentially burdening the company’s expansion.
Hiring through an EOR
An Employer of Record (EOR) is a company that hires employees on behalf of another company, negating the need to set up a legal entity or register a business. This allows businesses to quickly and inexpensively expand into new markets without making an immediate, long-term commitment. Companies can minimize their compliance risk abroad by using an EOR, which can help you navigate local labor laws without having to learn all the ins and outs yourself.
Here’s what an EOR can take care of:
- Compliance. From worker classification to labor laws on onboarding, working hours, employment contracts, and independent contractors, an EOR stays updated on local laws, so you don’t have to.
- Payroll and tax complexity. When you hire through an EOR, it's the EOR's responsibility to properly pay the employee and calculate and file the correct taxes for every paycheck. You're never left guessing if tax rates change.
- Local benefits administration. Every country has different statutory employee benefits that must be offered to employees—fail to offer them and your company can face penalties. From health insurance to paid time off, an EOR helps you stay compliant with benefits packages that meet local requirements.
- Termination. Did you know that in some countries, severance and notice periods are required with termination? An EOR can take care of those details based on local laws and help you handle your termination correctly. With Rippling, you can also offboard your employees from all company apps and email accounts and keep inventory of devices.
Pros and cons of an EOR
There are many key benefits of expanding into new markets with an EOR, but before moving forward, also know that an Employer of Record has a few drawbacks.
Pros of an EOR
Cons of an EOR
Fast hiring in new markets. There’s no need to open a new entity and hire local experts before you can hire employees abroad. Onboard an employee in another country in minutes and speed up your hiring process to avoid losing potential candidates.
Time limits imposed by certain countries. Some countries have limits on how long you can use an EOR; for example, in Germany, you can only manage an employee through an EOR for 18 months.
No need to stay on top of compliance, payroll, and taxes. An EOR specializes in understanding foreign laws and acts on your company’s behalf to ensure total compliance with payroll, taxes, worker classification, and other regulations.
It’s expensive once you hit a certain hiring threshold. Since an EOR often charges per employee, it can become cost-prohibitive as your business scales. Eventually, your business may get big enough that a legal entity becomes more cost-effective.
Access to local HR advisors. Navigating complex hiring processes abroad can get overwhelming fast. But with an EOR like Rippling, you have the support you need through local HR advisors if a question or compliance concern arises.
Less control over your employees. Using an EOR means relinquishing some control over your employees since the EOR employs them on your behalf. It’s also important to consider the potential risks of using a third party to handle sensitive personnel information.
Easily transition to a legal entity. Rippling’s EOR is built on top of our native payroll rails, so when your company scales and is ready to transition from an EOR to a legal entity abroad, the switch is seamless and takes minutes.
Cost comparison
To illustrate the differences between using an EOR and establishing your own legal entity, let’s look at both options in action. Suppose your company wants to expand into India.
Navigating employment law in India can be particularly challenging. A few examples:
- When starting a business entity in India, you need to have documents apostilled—a lengthy process that involves having them notarized in person, then sending the notarized forms to your state government where they essentially “notarize the notarization” before you can send the paperwork to India.
- Compliance in India can be painful. Take the digital signature certificate (DSC) process required for signing documents in India: The person obtaining the DSC must appear on a timed video call and follow strict instructions, including receiving and reading aloud codes from their mobile number and email, while showing their passport and driver’s license next to their face. After recording and submitting the video call, they need to make a follow-up voice call to tele-verify their DSC information, including answering any questions the operator may have about their identity.
- It’s mandatory for foreign companies to appoint a Resident Director in India if they want to set up a subsidiary, joint venture, or branch office in the country. This means relying on one of your early employees to do this, as it's hard to remove them later down the line.
- Indian employees have different statutory minimums for earned leave entitlements depending on which state they live in.
- India also has new rules around how employers need to safeguard employees’ personal data.
These are just a few of the intricacies to consider before setting up a legal entity in the country.
As an employer, it’s your responsibility to know and abide by all of the laws and regulations in every country where you do business. When choosing between an EOR or setting up your own entity, here's a breakdown of the considerations you need to take into account:
Legal entity in India
EOR in India
Cost to establish entity
Initial incorporation fees range from Rs.10,000 to Rs.30,000 (USD 100-400) based on business complexity, with additional charges for legal, accounting, and government services.
$0
Timeline to first hire
7+ months
Immediately
Setting up a bank account
Strict restrictions over non-resident accounts and must be opened in person
Not required
Required personnel
Every company must have at least one director who has resided in India for at least 182 days in the financial year—they act as a legal representative for your company.
Use your current HR and/or executive team.
Ongoing maintenance fees
Thousands of dollars on accounting, payroll, compliance, local taxes, and more
Starts at $8 per user per month
Employee benefits (required and supplemental)
Difficulty keeping up with changing labor laws and navigating unfamiliar social norms and language cues
An EOR like Rippling automatically offers the correct statutory benefits to employees based on location.
Payroll services
Additional costs to hire third-party payroll and legal providers
Included in EOR pricing
Setting up a legal entity abroad is a long, expensive process. But through Rippling’s EOR entities, you can start hiring employees and contractors in India—and all over the world—quickly, compliantly, and for a fraction of the cost. See Rippling.
Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.
