Expanding into new markets is a big step for any business. It opens opportunities to reach new customers, tap into fresh talent, and spur growth.
However, there is one critical question to consider before hiring employees in another country: how do you do it legally?
You have two options: open a legal entity or partner with an Employer of Record (EOR).
Establishing an entity in a foreign market allows businesses to hire employees there legally.
It often requires investing significant time and money upfront but provides a solid foundation for companies with aggressive hiring goals and long-term growth plans in that particular country.
However, establishing an owned entity isn't necessarily the best solution for every company.
Depending on your international hiring needs, expansion plans, and available resources, EOR services could better align with your business's needs when building a global team.
Key takeaways:
- Setting up a legal entity requires significant time, money, and resources, making it ideal for long-term, single-country commitments.
- An EOR enables global hiring without entities, offering speed, flexibility, and cost savings.
- EORs are ideal for testing markets or scaling quickly, providing access to top talent across locations without delays.
Breaking Down the Logistics of International Expansion
First, let's examine the nitty gritty details of establishing a local entity in a foreign country.
For one, it can take anywhere from three to 12 months (or more!) and requires navigating complex regulations, business registration processes, and local labor laws.
This process demands significant time and financial investment, including legal fees, registration costs, and the setup of payroll systems.
On the other hand, an EOR provider offers a streamlined and efficient alternative, enabling faster market entry.
Providers like RemoFirst draft compliant employment contracts while managing global payroll, taxes, employee benefits administration, and compliance with local laws.
Aligning with Your Long-term Business Goals
Expanding into a new market is an important decision, and you should first evaluate your long-term goals to decide if opening an entity is the right fit.
For example, opening an entity would probably be the best choice if you plan on hiring a large workforce in a new country (a good rule of thumb is if your company's headcount will be 20+ employees in a given location).
Doing so gives your company complete control over local operations, allowing you to manage employees, payroll, and compliance directly. It also helps you establish a long-term presence, building credibility with local customers, partners, and stakeholders.
However, opening an entity also comes with inherent risks. If your business strategy shifts or the market doesn't perform as expected, shutting down an entity can involve significant costs, lengthy administrative processes, as well as time and money wasted.
An EOR partner offers a more flexible solution for companies still exploring or testing new markets. It enables a cost-effective and quick market entry, eliminates upfront costs, and reduces administrative burdens, making it easier for businesses looking to scale or adapt to quickly changing business needs.
Financial Implications of Global Expansion Decisions
Budget is the key factor for many companies when choosing between establishing an entity in a new country or partnering with an EOR.
That's because setting up an entity can cost anywhere from $20,000–$150,000, depending on the country. There are also ongoing expenses to account for, including:
- Company registration and licenses
- Legal and compliance consultations
- Office space, utilities, and infrastructure
- Setting up payroll and HR systems
- Ongoing expenses for onboarding new employees
These entity expenses can be a justified investment for businesses with long-term growth plans and/or planning to hire 30 or more employees in one region.
However, if your expansion plans are on a smaller scale and you need them to be more flexible, an EOR can offer a cost-effective alternative.
EORs reduce the financial burden of entering new markets in different countries by eliminating the need for setup and ongoing operational expenses.
Some savings associated with EOR services include:
- Lower setup costs: EORs charge flat fees or a percentage of employee salaries, avoiding the high upfront expenses of opening an entity.
- No office space needed: EORs enable remote work, eliminating potential leasing and operational expenditures.
- Reduced administrative costs: EORs handle payroll, benefits, and compliance, saving resources and avoiding the need for additional hires to manage the process.
Legal and Compliance Challenges in International Expansion
Establishing a legal entity in a foreign country requires strict compliance with local employment laws.
Each country has its own set of local regulations that dictate how businesses must operate, making it crucial to follow these requirements to prevent costly fines and potential legal complications.
Complying with local business laws involves securing permits and licenses and adhering to corporate structures. Companies must also follow employment regulations that dictate wages, working hours, and termination processes.
Maintaining accurate records and reporting is also essential to avoid fines, reputational harm, or even business closures.
Suppose your company lacks in-house expertise to handle these complexities. In that case, you'll likely need to seek out local legal professionals or partner with a third-party service provider to ensure compliance and stay on top of evolving regulations. While effective, this approach can significantly drive up operational costs.
Partnering with an EOR eliminates these challenges as the EOR takes on the responsibility of managing compliance, including:
- Employment law expertise: EORs ensure adherence to local labor laws, covering everything from contracts to termination procedures.
- Tax compliance: They handle payroll taxes and reporting, reducing the risk of penalties.
- Regulatory updates: EORs stay abreast of local law changes, ensuring your operations remain compliant without additional effort from your team.
- Risk mitigation: They assume liability for legal compliance issues, protecting your business from disputes or fines.
With an EOR, businesses can focus on international expansion with confidence and cost efficiency.
Factoring Global Growth Goals into Your Expansion Strategy
When expanding your business, the location of your future hires plays a pivotal role in shaping your strategy.
If your goal is to build a team in a single country, setting up a legal entity can provide operational control and establish a solid local presence. It's a long-term investment that makes sense for concentrated growth in one market.
However, if your strategy involves accessing the best talent globally, no matter where they live, opening and managing multiple entities becomes inefficient and costly.
Establishing a new entity for each country not only takes months but also creates delays in onboarding, increasing the risk of losing top candidates who might not wait through a lengthy process.
An EOR provides the flexibility to hire talent from a global workforce without establishing legal entities in each country.
EORs handle employment responsibilities, including compliance with local laws, and enable you to onboard employees quickly, sometimes in as little as one day with RemoFirst.
Assessing and Mitigating Tax Risks in International Operations
Opening an entity in a new country means your business assumes full responsibility for compliance with tax laws, and making an error can be costly.
Some potential tax regulation issues to be aware of include:
- Misclassification of income or expenses: Misreporting income, deductions, or expenses can lead to audits, fines, or penalties.
- Failure to register for applicable taxes: Many countries require businesses to register for corporate income tax, VAT (or GST), payroll taxes, and other levies. Missing any of these registrations can result in legal and financial consequences.
- Payroll tax errors: Incorrect calculations or failure to withhold the appropriate amount for employee taxes, such as income tax, social security, or retirement contributions, can trigger penalties.
- Neglecting tax treaty benefits or obligations: Failure to understand and follow tax treaties between the country where your entity is located and your home country could result in double taxation or missed opportunities for tax relief.
- Late or incomplete filings: Failing to submit accurate tax returns and financial statements on time can result in penalties and damage your company's reputation.
- Not adapting to local tax changes: Tax laws frequently change. Staying up-to-date with evolving regulations is critical but challenging, especially when operating in multiple jurisdictions.
Working with an EOR shifts these risks away from your business. By acting as the legal employer, the EOR manages tax compliance risks, including tracking and ensuring compliance with relevant regulatory changes.
Should I Open an Entity or Work with an EOR?
We just gave you a lot to think about, especially regarding the amount of risk that opening an entity involves. We're not pointing out these risks to scare you but to highlight the commitment opening an entity truly entails regarding compliance.
As we've covered, deciding whether to open an entity or work with an EOR depends entirely on your business needs and hiring plans.
Now that you have a clearer understanding of the factors to consider, it should be easier to weigh each approach's pros and cons.
It boils down to this: if you have plans for significant, long-term growth in one country, an entity is likely the best choice.
If your talent acquisition plan involves hiring a few employees in one country or several countries, the EOR model is probably your best option.
Not ready to open a new local entity in a new market? No problem.
With RemoFirst, you can compliantly hire international employees in 180+ countries and manage contractors in 150+ countries — all on one platform.
We oversee onboarding, global payroll, compliance, and employee benefits like health insurance. Pricing starts at $199 per employee per month and $25 per contractor per month, with no hidden fees or minimums.
Put simply, whether you’re scaling a startup or testing new markets, RemoFirst makes global hiring simple, efficient, and affordable. Schedule a demo today to learn how RemoFirst can simplify your global hiring process.
