One way for a company to grow is by expanding its footprint with a global expansion. At that point it’s time to make a choice — establish an entity in a new country or work with an Employer of Record (EOR).
Forming a legal entity involves navigating the legal, regulatory, and tax requirements of the new country. It will also require registering the business with the local authorities, obtaining necessary permits and licenses, and complying with local labor laws and regulations.
Working with an EOR service provider allows a business to avoid the hassle of those tasks, since the EOR partner will take on the hiring and managing of global talent — acting as their legal employer. EORs handle all of the formal employment tasks for global teams, including compliance documentation, global payroll processing, and benefits.
There are some key factors for business owners contemplating global hiring to consider before making a decision about which option will be best for them.
Opening an Entity: Costs & Considerations
There’s no way around it, opening a local entity in another country is neither cheap nor fast. There are a lot of upfront costs, which can run into the thousands or even hundreds of thousands of dollars. Some of these include, but by no means are limited to:
- Legal fees: Establishing your own legal entity is complex, and will require working with legal professionals to ensure you’re meeting all compliance and legal requirements.
- Professional fees: They say it takes a village to raise a child. Well, it takes an army of business professionals to open a local entity, including tax advisors, accountants, payroll administrators, local benefits administrators — you get the idea.
- Registration fees. These costs include employer registration, company registration, tax registration, statutory fees, the cost of obtaining a business license, and more.
- Insurance: Protecting the new location means purchasing a variety of insurance policies. This may include general liability, property, business interruption, and professional liability insurance.
- Administrative costs: Falling into the miscellaneous bucket, this includes costs for line items such as licenses, setting up bank accounts, payroll services, obtaining visas for employees, etc.
- Office space: Unless everyone at the new location will be working remote, your business will need to either buy or lease office space. Don’t forget to also budget for furniture, computers, software, internet, phone service, etc.
- Relocation expenses: If existing staff are being asked to relocate to the new country, your business will be footing the bill.
- Local resident director salary: Most countries require businesses opening an entity in their country to hire at least one local director.
- Capital requirements: Depending on the country, there may be a minimum amount of share capital that a company must issue and maintain in order to legally operate their entity.
Once you’re up and running, there will be ongoing costs related to the new entity, including expenses related to the physical property itself, employee wages, as well as ongoing HR support, including operations, legal, finance, and benefits administration teams.
Other factors to consider include the risk associated with opening an entity in an unfamiliar country. Potential pitfalls include inadvertent violations of labor laws, payroll tax laws, employee benefit laws, various compliance requirements, and more. If your business makes a mistake, you’ll be on the hook for any financial and legal penalties.
An entity setup in another country is also time-consuming. It can take months, or even up to a year or more to get set up. So if you’re looking to quickly enter a new market, opening a local entity is probably not the best option.
Case Study: The Cost to Open an Entity in Portugal
Here’s an example of the estimated costs for a business to open a new entity in Portugal versus partnering with an EOR.
Now let’s look at the estimated annual costs for an employee in Portugal with a €50,000 salary:
With owned entity = €138,438 euros + 21% of profits + 23% of goods sold (includes establishing entity and ongoing entity costs)
Via EOR = €68,038 euros + corporate taxes in company’s home country
As you can see, the costs are substantially higher to employ a Portuguese employee via an owned entity versus an EOR.
Partnering with an EOR: Costs & Considerations
When you work with an EOR for your international business expansion, it reduces a lot of the costs and time associated with establishing a new entity. For one thing, it’s much quicker to enter a new market. Instead of months, it can take as little as one day to get established in a foreign country.
In addition to the time savings, partnering with an EOR means you won’t be spending cash on any of the fees we outlined above, such as legal, registration, real estate, and more. You’ll also know exactly what you’ll be paying, since EOR fees are transparent.
Typically, you’ll pay one flat monthly fee per remote employee, which means no sticker shock from month to month. At RemoFirst, our pricing starts at $199 per person, per month for employees, and independent contractor services start at $25 per person, per month. These costs include:
- The ability to hire top talent with one click in 180+ countries
- Compliant and localized employment contract creation
- Streamlined payroll processing, including making international payments with one invoice
- Tax filings, pensions, and more
- Access to benefits and health insurance for your employees
- Visa and work permit assistance in 85+ countries
- HR onboarding
- On-demand expertise of local laws and regulations
- Background checks
- 24/5 support
- IP protection
Other advantages of Employer of Record services include:
- Reduced risk: Since the EOR serves as the legal employer of any international staff, you don’t have to worry about learning local employment laws regarding tax regulations, payroll, and employee benefits packages. The EOR handles all of that, and assumes the associated risk.
- Local experts: EORs either employ their own staff in each country, or partner with locals who are knowledgeable of all the ins and outs of doing business there.
- Fast onboarding: Companies are able to easily add new employees and get them up and running in as little as 24 hours.
- Flexibility: An EOR offers the opportunity to test the waters in a new market, without the headache, time, and expense of establishing an entity first.
- Access to global talent pool: Working with an EOR enables companies to recruit and employ international employees from pretty much anywhere in the world, including full-time employees and contractors.
- Scalability: It’s easy to enter or exit new markets, since there’s no brick and mortar location or other long-term commitment in terms of time and money invested.
- Time savings: Since you won’t be managing all of the administrative details for your staff in another country, you’ll free up more time to focus on your core business activities.
Entity or EOR: Which is Right for Your Business?
The answer to that question depends on several factors. Companies that could benefit from establishing an entity include those that:
- Hold fixed assets: If the nature of your business requires a fixed asset, such as a warehouse or fleet of vehicles, you most likely will be required to establish an entity in the new market.
- Plan on aggressively hiring: Companies adding a substantial headcount in the new country are likely planning to be in the market long-term. Depending on the number of employees who will be working at the new location, it could become cost prohibitive to work with an EOR due to the per-employee costs.
- Want to commit to the market: If a business wants to start small by employing a handful of people in a new market, it’s more cost-effective to work with an EOR. But if a decision is made to establish a long-term presence, including making a substantial headcount increase and/or purchasing real estate, opening an entity will likely be more cost-effective.
- Seek name recognition: If your business is trying to grow brand awareness in a new market, an entity is probably the way to go, since this points to your company making a larger investment in that location, and planning to be there for the long haul.
Businesses that will benefit from EOR services for their global workforce include those that want to:
- Quickly establish a presence in another country: Businesses can onboard new employees in as little as a day.
- Expand hiring options beyond borders: Instead of being limited to countries with an established entity, EORs enable remote work by providing the flexibility to hire anywhere.
- Keep costs down: It costs substantially less to employ a worker via an EOR than establishing an entity.
- Avoid compliance risks: As the official employer of international talent, the EOR assumes these risks, including potential contractor misclassification.
- Be able to scale up or down as needed: Entering or exiting a country via an entity is costly and time-consuming. Companies that partner with an EOR can quickly add or shed staff to quickly respond to business needs.
Ultimately, the decision to partner with an EOR provider or open an entity will depend on the goals, budget, and risk tolerance of your business. If you're a business owner that wants to begin employing talent globally, but want to avoid the expense of opening an entity, book a demo to learn how RemoFirst can help.
