Traditionally, companies used to set up their own entities in the country that they want to hire. This allowed them to operate legally, giving them the ability to expand and have full control over their employees and operations. However, this can be time-consuming and expensive. Hence the trend of hiring an Employer of Record (EOR) is rising. EOR is an already-established firm that employs talent on the company’s behalf and handles operations, legal compliance, and employee payrolls.

When you choose to set up an entity, it marks a long-term presence in the country you are hiring. Hence, if you want to establish an influential presence globally, then EOR might not be a good option. Similarly using an EOR might imply a temporary or less committed approach, potentially impacting relationships and market perception.

However, setting up an entity is generally long and time-consuming. An EOR is safer, quicker and easily scalable to hire and expand into new countries.

While both have pros and cons, choosing between opening your entity and Employer of Record will depend upon the company’s goals and targets.

In this blog, let us help you objectively compare the pros and cons of hiring and expanding with an entity and an EOR.

Employer of Record vs Entity: A Quick Overview 

Choosing between an Employer of Record and setting up your entity depends on your hiring and expansion goals

Here’s the primer:

Let’s look at each of these options:

Employer Of Record (EOR)

Definition

An Employer Of Record (EOR) helps businesses compliantly employ, pay, and administer benefits in countries where the latter doesn’t have a registered entity. It takes care of everything, from onboarding talent to tax and global compliance. The EOR acts as a legal employer for the onboarded talent handling payrolling and compliance while the client handles the day-to-day affairs of the employee.

How Does an EOR Work?

The EOR serves as the official or primary employer for the employee. On paper, the EOR is recognized as the employer, handling compliance, taxes, and payroll, while the client manages the day-to-day affairs. This enables the employer to minimize the risks of employing talent in foreign markets where they are unsure of compliance around hiring, setting up an entity, payroll, generating employment contracts, partnering with benefits vendors, etc.  Depending on the operating model, the company pays the EOR a fixed or a variable fee for its services.

Benefits of Choosing an EOR

1. Reduced set-up cost

By hiring an EOR, a company can cut costs they’d incur when setting up its own entity for hiring.

Setting up an entity can be expensive and resource-intensive as it means all the costs like global payroll, notarian fees, paid-up capital, and registering with local authorities will be borne by the company itself. When opting for an EOR all these costs get eliminated.

2.  Risk management

An EOR ensures compliance with tax regulations and employee standards. EORs employ several compliance specialists who ensure your candidate is employed in accordance with global labor regulations and local laws. This ensures you can expand into new markets with ease. 

3. Workforce flexibility

EOR is advantageous for companies that are testing new markets or have fluctuating employee needs. EOR provides companies with the flexibility to scale the workforce efficiently. It also helps you hire international contractors for your organization in a hassle-free manner.

4. Avoids worker misclassification

Many countries classify employees into contract workers and employees to ensure both types of employees are treated fairly by employers. Non-adherence to a country’s regulations around employee misclassification can draw severe penalties and legal complications. An EOR helps companies work according to these local regulations ensuring that there are no worker misclassifications.

Setting Up an Entity

Setting up your own entity for global hiring involves registering with local authorities, hiring compliance and HR experts, and having the capital requirement. You also need to keep up with new regulations.

Types of Entities

1. Ownership by Oneself: This form of business, which has a single owner, has the most basic business plan.

2. Collaboration: It concerns a business with two or more owners who share ownership.

3. LLC, or Limited Liability Company: In addition to offering personal liability protection, this model gives owners flexibility in management.

4. Business: A corporation is a more sophisticated type of business structure that can issue stock to raise cash and provide substantial liability protection since it is a distinct legal entity from its owners.

Pros and Cons of Setting Up an Entity

Here are some pros and cons of setting up your own entity for global hiring.

1. Pros

• Full control over HR activities and payroll functions, including operations.
• Higher chance of global expansion by setting up own entities in those countries.
• Increased global reach to employ talent worldwide.‍

2. Cons

• Takes time to set up and the cost incurred in complying with tax, payroll and labor laws, is high.

Factors to Consider When Comparing an  EOR and Setting up Your Own Entity

1. Legal compliance

• EOR: Partnering with an EOR will ensure that your company is compliant with labor laws, tax policies, employee benefits, holidays, etc. Your company will be kept up to date with any changes in global regulations.
• Entity: When you set up your entity, everything from legal compliance to taxes will be looked after by you. This means you are liable to incur any fines or penalties in case of non-compliance.

2. Control and flexibility over hiring and compliance 

• EOR: Partnering with an EOR gives you the flexibility to exit countries in times of business crisis, which might not be possible with having an entity due to the huge investments made.
• Entity: Unlike an EOR, setting up an entity allows full control over the relationship with your employee. Since an entity can only be used for hiring within the nation in which it is incorporated, it doesn't offer a lot of flexibility. Since you have made a sizable investment in the country or countries in which you operate your own business, you might also be hesitant to hire in other nations

3. Cost considerations

• EOR: EORs can significantly lower entry barriers because they do not require you to invest money or resources, unlike setting up an entity. EORs often charge a set monthly fee, which keeps expenses uniform and predictable across nations. 
• Entity: Setting up an entity requires a huge investment in registrations, operations, and legal formalities. Moreover, there is a recurring cost for employee onboarding and staff management.

4. Employee satisfaction

• EOR: EORs help you offer the best benefits to your employees globally that are in compliance with local laws and are in line with local benchmarks. This ensures your employees get the best and locally relevant benefits. Consequently, you hire the best talent. make your talent acquisition more competitive across borders - all without having to set up a HR or a compliance team in every country you hire .

• Entity: When establishing an entity, you can hire people directly and maintain total control over the working relationship.The control also allows the company to tailor practices specifically to its culture and operational strategies, ensuring a more cohesive and integrated employee experience. However, this also means you have to partner with multiple vendors.

5. Responsibility for compliance 

• EOR:  An EOR guarantees compliance if local labor regulations change, lowering your risk of legal action. Payroll disputes are handled by the EOR sometimes using crypto payroll, protecting your business from possible legal and financial repercussions. 
• Entity: Owning an entity means assuming full responsibility for your business and accepting all risks. Your company may be subject to penalties and legal action in case local labor laws are broken. For example, The main reason why less than 25% of US-based businesses who expand internationally are successful is that they are unaware of the local rules in the new country, hence partnering with an EOR here would be beneficial.

6. Scalability 

• EOR: Since EORs manage administrative complications, businesses can scale easily and swiftly enter new markets without having to establish legal entities. This adaptability allows for quick expansion without requiring substantial initial outlays.
• Entity: There is additional complexity involved in scaling with your organization, including tax, legal, and compliance considerations. Scalability is a more complex procedure since it takes a lot of time, money, and experience to set up new entities in other nations.

When Can Companies Set Up Their Own Entity for Global Hiring?

•  Confidence and long-term commitment to the market 

Owning an entity provides stability and local recognition. If you are confident in a market's long-term performance and wish to establish a long-term presence, by opening offices, an entity is the way to go.

• Financial readiness

It's critical to have a healthy cash flow for setup expenses. The cost of establishing your business can be pretty high, including costs for registration, legal counsel, and compliance. It's crucial to secure funding for ongoing HR, payroll, and compliance costs. While EOR services take care of these things, moving to your company entails paying for things like payroll processing, tax compliance, HR team salaries, and continuous legal requirements.

• Familiarity with local compliance

When you partner with an EOR, everything from local compliance to employee payroll and satisfaction is taken care of. However, all of this should be taken care of by you when you set up an entity. Since EOR becomes the legal employer, it puts the onus of any penalties or compliance risk on them. But if you decide to set up an entity, you will be directly liable for any local law violations and legal issues.

When to Choose an Employer of Record?

You’re still building your HR & compliance team

When companies don't have a lot of resources or legal knowledge to handle employment laws, tax laws, and labor laws locally, EORs can provide the agility to set shop in a new country and expand fast. 

Limited resources

By offering scalable solutions that let businesses onboard and offboard staff as needed without making long-term commitments, EORs give flexibility especially when businesses are going through resource cutdowns or financially tough times. Also, if you want to expand your business globally by hiring remote talent, but don’t have the finances, partnering with an EOR will help you achieve this.

Temporary or Project-based workforce

Managing contract or temporary labor requires the hiring of employees, onboarding, and compliance efforts. Businesses are relieved of these administrative duties by EORs, who take care of payroll processing, benefits administration, and compliance monitoring.

You’re unsure about entering a new market

EOR allows you to test the global market before you can give your long-term commitment to it. It allows you to analyze customer expectations and test the waters when you decide to partner with an EOR to hire talent in that particular country. This also means that if the market isn't suitable for your business needs, you can withdraw anytime without the need to worry about the investment you made. This option isn’t feasible when it comes to setting up an entity.

Employer of Record Vs Entity: What Should You Choose?

Your long-term objectives, the resources you have at your disposal, and your operational requirements will all play a role in the decision you make on whether to open an entity or engage with an Employer of Record (EOR). 

Consider the following scenarios and questions:

• Financial Restrictions: Would a flexible EOR model better suit your financial plans?

• Scalability: Are you planning rapid expansion across multiple countries? 

• Compliance Requirements: Would the quick compliance provided by an EOR lessen your burden, or are you ready to handle the complexities of international labor regulations on your own?

If ensuring immediate compliance and scaling efficiently is your priority, then an EOR is your best option. Experience seamless international employment with Gloroots. Let us handle the complexities while you focus on growth. Sign up for a demo today and see how we can simplify your global talent management!