Article
15 min read
Author
Jemima Owen-Jones
Published
December 18, 2023
Last Update
July 23, 2024
Table of Contents
When you’re done testing new markets and want to build a physical presence
When you’ve got the capital to pay for initial set-up costs
When you can guarantee the funds for ongoing HR, payroll, and compliance costs
When you’ve wrapped your head around the set-up process and time investment
When your HR team has mastered local labor laws
When you’re happy to outsource your payroll function to a local payroll provider
When you’re ready to own your ongoing compliance risk
EOR or entity, you can do it all with Deel
Let's imagine your business is ticking along nicely. You've gained a deeper understanding of your target market, facilitated strong customer relationships, developed strong brand recognition, and built a solid workforce presence in numerous local markets worldwide through EOR hiring. At what point should you consider opening your own local entity?
You may have read online somewhere that an employer of record (EOR) solution isn't designed to be permanent and that, sooner or later, most companies need to set up a local entity before they potentially outgrow the limits of an EOR and trigger a taxable presence or permanent establishment (PE) under local law.
However, very few countries have firm laws regarding EOR limits. In fact, when an EOR is the official employer of your workforce, their connection with your company is weak, which actually mitigates any risk of PE.
Similarly, you may have read that certain business activities carried out in a foreign country will attract the attention of tax authorities. However, most business activities are of little interest to the tax authorities since the EOR exports the service from the employing country to another country.
For instance, an engineer's work isn’t likely to trigger a permanent establishment since the service does not generate any revenue for the business in the country.
The exception to this rule is when the employee, hired through EOR services, uses their service to interact directly with the local market. For example, a salesperson employed in Columbia sells directly to the Colombian market. In this scenario, the EOR will invoice the client company to collect VAT for that service.
Often, tax authorities may look favorably upon EOR arrangements since they are heavily regulated and are responsible for withholding and remitting taxes to local tax authorities, ensuring that all the necessary taxes and employer contributions are paid directly to the local government in a compliant and timely manner.
See also: Prevent Double Taxation: Strategies for Global Enterprise Businesses.
Another common misconception is that once a company reaches a certain size in a market, an entity becomes more cost-effective than an EOR; however, these assumptions fail to acknowledge that an EOR isn't just an employment solution.
In many cases, EORs also serve as global payroll providers, HR departments, and robust compliance solutions. Once a company opts out of this arrangement, it must build out its own operations for a significant time investment and ongoing cost.
Try doing that for every country you want to hire! (We did, and now we have over 110 + wholly-owned Deel entities and some of the best country experts around the world… but it took many years and hasn’t come cheap).
So, if these assumptions about EOR arrangements aren't necessarily true, when should you consider opening your own entity instead of hiring through an EOR? This article explores seven telltale signs that you may be ready to open your own entity.
If you have confidence in the long-term success of a particular market and intend to expand your business by opening foreign offices or facilities, establishing your own entity could be an ideal next step.
Although success in a market can never be guaranteed, there are certain indicators that can help you anticipate your chances of success, such as the availability of local talent, a promising market size, stable market growth, increasing demand, and a safe, competitive environment.
However, even with all of these factors in place, success is not guaranteed. Your business needs, the local market, and the economy are constantly changing, and new competitors can emerge at any time. Companies that are agile and adapt to change are more likely to succeed over the long term.
EOR services like Deel relieve you of the pressure of having total confidence in a particular market. You can quickly enter new markets when you perceive an opportunity and easily withdraw as soon as things stop working out.
This flexibility is particularly beneficial for companies that want to test new markets or engage in short-term projects without committing to long-term establishment. If things work out, great; you can set up your own entity there or continue to enjoy the low-maintenance flexibility of the EOR model.
Discover how Telin cut onboarding time and expanded globally with Deel.
The cost and time savings for Telin’s business have been significant by using Deel…We have the flexibility to enter various markets, with relevant risks mitigated and market testing conducted beforehand.
—Doni Adriansyah,
Chief of Finance and Risk Management Officer
Estimated upfront entity set-up costs | Estimated upfront EOR set-up costs | |
---|---|---|
Min | $60,000 | $0 |
Max | $120,000 | $0 |
There are no upfront setup costs associated with hiring international employees through an EOR in a particular country, only an ongoing monthly fee. However, the upfront costs of hiring through your own foreign entity are significant. They can vary depending on several factors, including the country, the type of entity, and the complexity of the process. However, businesses generally expect to pay between $60,000 and $120,000 to set up a new foreign entity, according to Deel’s estimations.
Here is a breakdown of the average costs of setting up a new foreign entity:
Average VAT registration fees | |
---|---|
US | $500 - $1,000 |
Canada | $1,000 - $2,000 |
UK | £200 - £400 |
Australia | $500 - $1,000 |
Singapore | S$500 - S$1,000 |
Companies can mitigate these setup costs and build a local presence worldwide by hiring through an EOR like Deel. Deel does not charge any upfront setup fees, which means no significant investment is necessary, and there are no financial losses or entity teardown fees if the business fails or decides to exit a market.
Discover how Deel helped Clara expand its business without increasing expenses.
With Deel, we can hire no matter where the people are, [and] at the same time we save because the company grows, but the operating costs remain the same.
—Carolina Astaiza,
Global People Director
In addition to the initial set-up costs of establishing a foreign entity, businesses also need to budget for ongoing expenses such as accounting, tax, payroll processing, benefits administration together with governance and compliance with local labor laws.
EOR services take care of these responsibilities, allowing companies to focus on their core business activities. But, when you transition to your own entity, these costs fall directly onto the company's lap, and you're unlikely to benefit from any discounts or deals the EOR receives through its partnerships with insurance providers and integration partners.
Here is a breakdown of the average ongoing costs of running a foreign entity. Bear in mind costs can vary significantly depending on the size and complexity of the organization, the industry in which it operates, and the location of its employees and place of incorporation.
Ongoing entity payroll administration costs | Ongoing EOR payroll administration costs | ||
---|---|---|---|
Min per year | $50,230 | $7,188 | |
Max per year | $61,230 | $7,188 |
By using an EOR service, companies can avoid the expenses of maintaining their own legal entity in a foreign country.
Deel EOR is an all-in-one hiring, payroll, HR, and compliance solution. We handle everything, from employee onboarding and offboarding, contract creation, compliance document collection, and work authorization verification to global payroll and tax withholding, benefits administration, background checks, continuous compliance monitoring, and so much more.
Already own foreign entities but still want to benefit from consolidated entity management? No problem. Add your entities into Deel and standardize payroll reporting, HR, and workforce compliance across all your entities from one centralized platform.
Discover how Strada unified its US payroll and global hiring and saved 10k+ USD using Deel’s all-in-one platform.
We were looking for a solution that would let us hire contractors or EOR employees, run payroll in the US, take care of benefits and taxes, help us set up new entities, and more, all in the same place. We found all of that in Deel.
—Amir Prodensky,
co-founder and CEO
When using an EOR partner, you skip past all the bureaucracy in setting up your own entity and can start hiring employees in any country immediately. However, setting up a new foreign entity involves several time-consuming steps that can vary depending on the specific country and the desired entity type before you can make your first local hire.
The entity setup and incorporation process, including license procurement, can take anywhere from two weeks to two years and involves the following steps:
Choosing a location
Selecting a business structure
Obtaining a business name
Collection and preparing legal documents
Obtaining necessary licenses and permits
Registering the entity with the government
Opening a business bank account
Obtaining tax identification numbers
Setting up payroll and accounting systems
Hiring employees
When it comes to opening a foreign entity, obtaining the necessary government filings and approvals can often be a time-consuming process. Unfortunately, government bureaucracy in most countries is not known for being fast or efficient, which can lead to frustrating delays. Additionally, unexpected complications or issues with the application, such as missing documents or incomplete information, can further slow down the approval process.
See also: A Guide to Setting up a Local Entity.
Some EORs, like Deel, can provide guidance and support in setting up your own entity, including legal entity formation, registration, and ongoing requirements. We can help streamline the process and ensure you meet all the necessary legal and regulatory obligations so you’re up and running in a fraction of the time.
Discover how Deel saved Nium 12+ months of effort to expand into a dozen new geographies.
Deel enabled us to achieve our mission to reach and expand new markets with a faster turnaround time. I would say it saved us at least 12 to 24 months of effort. I’d recommend Deel to anyone who would like to expand globally and has limited time and resources to build the capability internally.
—Nupur Mehta,
VP of Human Resources
When using an EOR, local in-house HR professionals take care of the legal and compliance considerations concerning your global workforce. However, when you form a local entity, these administrative responsibilities are yours to oversee.
Unless you’re planning to hire a team of local HR professionals to manage your new HR function in your new entity location, you’ll need to get your existing HR team up to speed on local labor laws and regulations concerning the following:
Worker classification
Work hours
Rest breaks
Onboarding and offboarding
Union and applicable collective bargaining agreements
Employee benefit entitlements such as PTO, parental leave, and pensions
Background checks
Payment methods
Payment periods
Payroll records
It can take many months for a company to build an HR team locally or train its existing HR personnel to handle these highly localized functions. Failure to operate effectively can result in significant fines, penalties, reputational damage, and even criminal prosecution.
See also: HR Compliance: How Can Startups Use HR Automation Tools.
EORs like Deel have local HR professionals in countries worldwide who are equipped to handle local employment contracts, minimum wages, and mandatory benefits in every new country you decide to hire. They can streamline employee onboarding and offboarding processes, ensuring workers are up and running quickly and compliantly.
Discover how Finder reduces HR admin by 20% and cuts onboarding time in half with Deel.
Having Deel’s team handle compliance and statutory requirements frees up my time to focus on providing better workplace experiences, like onboarding to building the capabilities of our workforce.
—Isaiah James Peralta,
Head of Distributed Services
When using an EOR, in-house payroll experts in local jurisdictions across 100 different countries navigate global payroll on your behalf to ensure accurate, on-time payroll in every country in which you operate. However, when you form a local entity, payroll becomes your weekly, biweekly, or monthly task to oversee.
Unless you’re planning to build or train an internal payroll team on local payroll laws, available payment methods, currencies, exchange rates, tax regulations, rates, and deadlines, most businesses opt to outsource their payroll function to a local payroll provider.
The issue is if you operate in multiple countries, running payroll through several local providers can get complicated. Another option is to hire a payroll aggregator that uses external third-party partners to process payroll locally. However, this often leads to low-quality support and multiple touchpoints.
See also: Guide to Global Payroll.
EORs like Deel, with global payroll expertise, can help you run payroll in 100+ countries with one platform to consolidate and streamline international expansion and eliminate the ongoing admin of local compliance, taxes, benefits, and more.
Automatically sync employee details from your HR platform and get your international team onboarded seamlessly. Once they’re onboarded, we’ll handle all the payroll calculations for them.
Instead of using multiple payroll platforms, review your team’s salaries and taxes in one system. Need to add a bonus or a last-minute expense? Add it in seconds.
Our payroll managers ensure that all your payments comply with local regulations. They take care of everything, from taxes and government declarations to processing payments on your behalf in eligible countries.
Discover how Change.org saves over 300 hours on admin each month running payroll with Deel.
Other providers are stuck in the past in the way their platforms are built and the way their customer service works. We wanted the elevated experience Deel provides.
—Allie Shulman,
People Ops Director
As the legal employer of your international hires, EORs often assume full liability should a workforce compliance risk or violation occur. However, when you establish your own entity, upholding compliance is your top priority.
Unless you’re planning to hire a team of local compliance professionals to keep you on track, you’ll need to get your existing compliance department familiar with the following:
Data collection regulations
Data privacy and protection laws
Intellectual property regulations
Payroll and tax reporting regulations
Labor laws and regulations
Again, it can take many months for a company to build a compliance department locally or train its existing compliance officers to handle highly nuanced laws and regulations. Failure to operate compliantly can result in significant fines, penalties, reputational damage, and even criminal prosecution.
EORs like Deel take on all of the responsibility to ensure you comply with local laws and regulations. They ensure that:
Employment contracts are vetted by legal experts and updated quarterly since labor laws constantly change
All mandatory local benefits packages, like health insurance and pensions, are handled for you
Your workers are correctly classified to avoid misclassification risks
You have access to vetted data protection and confidentiality agreements
All data is processed in alignment with globally recognized data security programs and frameworks such as GDPR
All the proper payroll taxes, social contributions, and other government fees are paid accurately and on time
Payroll, payslips, and all things HR admin are taken care of
We also help you stay on top of continuous compliance with our Compliance Hub, which provides access to the latest regulatory updates and risk warnings, offering guidance and actionable alerts to enhance compliance.
Discover how SiteMinder confidently expanded in global markets while staying compliant with Deel.
Deel is currently supporting us with around 52 employees spread out across around 11 countries at the moment…The benefits of Deel’s dashboard allow us to manage these 52 people effectively from one platform. It also allows greater efficiencies for our payroll teams globally.
—Bec Donnelly,
Vice President of People
Knowing when to open your own entity is a tricky decision. It entails having total confidence in the local market, having the capital to cover upfront setup and ongoing running costs, having a long enough runway and time investment to undergo the setup process, and having access to well-trained HR, payroll, and compliance professionals to help you navigate local laws and regulations.
With legal entities in 110+ countries, Deel’s global employer of record model enables you to skip all of these costs and considerations and hire employees quickly, compliantly, and cost-effectively. We handle all things compliance—contracts, minimum wage, terminations, and more—and manage tax deductions, pensions, benefits, and other payroll specifics, so you can focus on growth.
If you eventually choose to open an entity, Deel can provide you with Entity Setup services and Global Payroll support. You can customize your approach by leveraging multiple Deel services, such as using the EOR model for certain locations, opting for Global Payroll in others, and even hiring independent contractors when necessary.
To discuss your options with an expert, book a 30-minute demo with our team today.
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