EOR vs Legal Entity: What’s the Real Cost Over 12 Months?

The Basics of Using an Employer of Record vs Setting Up Legal Entities

Let's dive into what EOR services and legal entities involve, and how they each play a role in supporting companies' global growth goals: 

Using an Employer of Record 

Employer of Record (EOR) service providers are third-party organizations that allow companies to employ workers in foreign countries without the need to set up an entity locally. The EOR becomes the legal employer on another company's behalf, handling everything related to compliance, taxes, and employment-related duties.

Key Responsibilities of an EOR Include:

• Manage payroll processing for your international employees, ensuring timely and accurate payments while following local tax rules.
• Keep your business compliant with local labor laws, tax regulations, and employee rights in each country.
• Handle employee benefit administration like health insurance, pension contributions, and other local perks.
• Take care of employment contracts, ensuring they meet local legal standards.
• Help onboard new international hires and manage offboarding and terminations as needed.

Legal Entity Route 

When you create a legal entity, your business establishes a local company in the foreign country. This company then legally employs workers and takes care of following all the local rules and regulations.

Types of Legal Entities Include:

• Subsidiaries: A separate legal entity owned by the parent company, but distinct in operations and liabilities.
• Branch office: A local office that is part of the parent company, with the same legal identity.
• Representative offices: Typically used for marketing, research, or liaison purposes without the ability to engage in direct sales.
• Joint ventures: A partnership with a local business entity to share resources, risks, and profits.
• Local corporations: The most complex setup, which often requires significant legal and financial resources.

Setting up a legal entity in a foreign market typically means you'll need to deal with:

• Legal fees and costs: Incorporation, local licenses, and permits.
• Compliance and auditing: Ensuring all local and international regulations are met.
• Local tax representation: Navigating the complexities of local tax laws and VAT.
• HR administration: Managing recruitment, payroll, and benefits in compliance with local labor laws.
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Choosing Between an EOR and Setting Up a Legal Entity

Deciding between using an Employer of Record or setting up a legal entity really depends on what your business values most and how you want to allocate your resources. If you’re focused on speed and flexibility, an EOR is an excellent solution. On the other hand, if long-term control is a top priority, establishing a legal entity could be a better fit.

Consider these factors when making this decision for your business:

Compliance and Risk

An Employer of Record handles all compliance responsibilities, ensuring your business meets local labor laws, tax regulations, and employee protections. This reduces the risk of legal issues and fines. With an EOR, you can rely on experts to manage payroll, taxes, and benefits, which minimizes your exposure to compliance risks.

In contrast, setting up a legal entity means your business takes full responsibility for compliance. You’ll need to navigate complex local tax systems and employment laws, and failure to comply can lead to penalties or legal problems.

Operational Flexibility

‍Choosing an EOR offers operational flexibility. You can scale quickly, whether you’re hiring a small team or expanding fast, without worrying about local labor laws or additional setup costs. The EOR manages the complexities of hiring, payroll, and compliance in multiple countries, allowing your business to focus on growth.

In comparison, establishing a legal entity gives you more control but with less flexibility. It’s a long-term commitment that requires maintaining local operations, handling payroll, compliance, and employee management, which can be more time-consuming and expensive when scaling.

Speed to Market

‍An EOR enables fast market entry. Setting up a legal entity can take months due to bureaucracy and legal requirements, whereas an EOR can have employees on the ground in days or weeks. This speed is perfect for businesses wanting to test new markets or quickly expand without the lengthy setup process.

On the other hand, setting up a foreign subsidiary can be slow and cumbersome, delaying your ability to respond to market demands or hire quickly compared to an EOR.
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Seamlessly Transition From Subsidiary to EOR

Retain talent and your market presence when shutting down entities, by switching to EOR solutions.

Learn More

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Employee Experience

‍With an EOR, while your business maintains control over day-to-day work, the EOR handles compensation, benefits, and compliance, ensuring a smooth employee experience. The EOR provides local benefits like health insurance and pensions, and your company can still focus on employee relationships and a positive work environment.

Establishing a legal entity gives you full control over employee experience, including culture, benefits, and policies. However, it also comes with the added responsibility of managing employee relations and compliance, which can distract from focusing on the experience, especially in foreign markets.

Global Employment Support

‍An EOR offers seamless global employment support, helping businesses manage employees across multiple countries and ensuring compliance with local labor laws. It allows companies to hire in different regions without setting up individual entities. This is ideal for businesses looking to expand quickly.

Setting up a legal entity requires building local infrastructure in each country, including HR departments and navigating local laws. While a legal entity provides deeper integration, it also demands significant resources to manage employees across borders and can be complex without local expertise.
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The Cost of Using an Employer of Record vs Setting Up Own Entity

When deciding between using an EOR or setting up your own legal entity, it's important to consider both the visible and hidden costs. While EOR services may seem more expensive upfront, they can often save you money in the long run when you factor in the time, complexity, and ongoing costs of managing a legal entity.

Visible and Hidden Costs

Employer of Record Costs

• Service fees: Typically monthly charges per employee, covering payroll, benefits, and compliance. For example, Playroll’s fees start at $399 per month, per employee.
• Employee benefits: Statutory benefits are included, but offering competitive benefits packages to employees will incur additional costs.
• Add-on services: Some EORs offer extra services (like visa assistance) at an additional cost.

Legal Entity Costs

• Incorporation fees: Costs for registering your business, legal fees, and other administrative expenses.
• Local tax representation: You'll need to hire a tax advisor and establish local tax representation to navigate the system.
• HR and payroll setup: Initial costs for setting up payroll and benefits systems locally can be significant.
• Ongoing maintenance: There are continuous costs for HR administration, legal compliance, auditing, and banking.

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Case Study: The Cost to Open an Entity vs Using an EOR in Canada

To illustrate the real costs associated with opening a legal entity versus using an Employer of Record, let's look at Canada, a popular market for businesses expanding internationally.

Opening a Legal Entity in Canada

Setting up a legal entity in Canada comes with significant upfront and ongoing costs. From legal fees and incorporation charges to ongoing tax filings and compliance management, it can be a costly and time-consuming process. Here’s a breakdown of some of the major costs involved in establishing a legal entity:

Using an EOR in Canada

Now, let’s compare that to using an Employer of Record.

• ‍EOR Service Fees: $500 to $2,500 per employee per month (Playroll’s fees start at $399 per employee)
• ‍Employee Benefits & Administration: Included in the EOR service fee (health insurance, pensions, legal benefits)
• ‍No Additional Legal & Compliance Fees: The EOR covers all legal requirements, taxes, and compliance

For businesses seeking quick and cost-effective expansion, an EOR is a great option. If you plan to hire a large team in one location and build a long-term market presence, setting up an entity may make more sense. But for initial market entry, the EOR is often the more affordable solution.

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The Overall Pros and Cons of Setting Up an Entity Set-Up vs EOR

Pros and Cons of an Employer of Record

And EOR can be great for your business for these reasons:

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We’re very grateful for Playroll’s support, they moved mountains to make our migration happen in the timeframe we required. We were able to bring all our employees on board, and now have direct supervision and peace of mind. Playroll has been an excellent partner throughout the whole process. They set up regular check-ins with us that provide a lot of clarity to the management team.

Jordan Scali, HR Operations Manager, MultiMedia

Learn how Playroll helped Multimedia scale globally

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Some downsides to consider include:

• Less Control Over the Employee Experience: While the EOR handles benefits and payroll, you may have less influence over the employee experience and company culture than if you were running your own local entity.
• Ongoing Fees: Although EORs save you on initial setup costs, the service fees can add up, especially if you have a large team or are using the service long-term.
• Limited Integration in the Market: While an EOR helps you hire quickly in new regions, you won’t get the same level of local brand presence or integration as you would by setting up your own legal entity.
• ‍Reliance on Third Parties: By working with an EOR, you’re dependent on an external provider for crucial HR functions. This means if there are any disruptions on the provider’s end, it could impact your business operations and expose you to risks. That's why it's so important to thoroughly vet quality customer service when choosing an EOR provider.

Pros and Cons of Setting Up a Legal Entity

While using an EOR comes with attractive benefits, it is important to also consider the pros and cons associated with setting up a legal entity: 

• ‍Growth Potential: A legal entity makes it easier to hire large teams in a particular region.‍
• Complete Control: Running your own entity comes with full control over payroll, benefits, employee relations, and policies.‍
• Stronger Presence: A local entity builds market trust, boosts visibility, and shows long-term commitment to the region
• ‍Tax Benefits: Some countries offer tax incentives for setting up a local entity, helping cut costs and boost profits.

The downsides of setting up entities include:

• Costly to Exit: If you need to downsize or respond to a fluctuating market, it’s costly to close your entity and time-consuming to exit the market again.
• High Initial Costs: Setting up a legal entity involves high upfront costs like incorporation fees, legal expenses, and tax representation.
• ‍Complex Process: The registration process can be time-consuming and complicated, which might delay your entry into the market.
• ‍Ongoing Admin Burden: You’ll be responsible for compliance, payroll, and HR tasks, which can become overwhelming as your business grows.
• ‍Increased Risk: A local entity means taking on full responsibility for legal, financial, and regulatory compliance, which adds more risk in a new market.
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EOR vs. Own Entity: 9 Questions to Make the Right Decision

Choosing between using an EOR and establishing your own legal entity is a tough decision that should not be taken lightly. We’ve put together a few questions that will help guide you through this important decision-making process: 

1. How quickly do you need to enter the market?
2. What is your tolerance for compliance risks?
3. Do you plan to hire many employees in the new market?
4. Are you focused on short-term or long-term growth?
5. What resources are available to manage HR and legal compliance?
6. Is establishing a strong local presence a priority?
7. How important is operational flexibility for your business?
8. Do you need to provide employees with local benefits?
9. Are you prepared for the cost of setting up and maintaining a legal entity?
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Moving From a Legal Entity to an EOR

Switching from a legal entity to an Employer of Record  can be a good choice for businesses that need to simplify their operations, cut costs, and increase flexibility as they expand internationally. This transition is especially useful for companies that started with a local entity but now find managing it – due to administrative burdens, compliance risks, and ongoing costs – too complex or expensive.

For example, if a business initially set up a local entity with a large team but has since downsized to just a few employees, the costs and complexity of maintaining a legal entity may no longer make sense. Switching to an EOR allows them to focus on core operations while outsourcing HR and compliance tasks.

Key Considerations for the Transition

• Employees will need to sign new contracts with the Employer of Record, as they will officially take over as the employer. It’s important to keep communication open and clear to help everything run smoothly and to address any questions or concerns employees might have.
• When evaluating EOR partners, make sure they offer solid support for both employees and employers, and have a strong grasp on compliance. This will help protect your data during the transition, ensure they follow local labor laws and tax rules, and provide the support your employees need.
• If you're dissolving or unregistering your subsidiary, be sure to settle any taxes, liabilities, and legal responsibilities. 
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Simplify Global Expansion with Playroll

At Playroll, we combine quality human service and deep compliance expertise to help you navigate global expansion or to support your transition from subsidiaries to EOR services.

Our EOR services manage payroll, compliance, benefits, and local laws without the need for a local entity. With hands-on support and tailored, cost-effective solutions, you can scale quickly, reduce risk, and focus on growth. Schedule a chat with our team to learn how to simplify your global expansion journey.