7 Reasons to Open Your Own Entity Instead of Hiring Through an EOR

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.

What about the costs?

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.

1. When you’re done testing new markets and want to build a physical presence 

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.

Build the best team, wherever they are.

Hire the right talent for the job based on their skills, not location. See how an EOR makes it possible with this free guide.

2. When you’ve got the capital to pay for initial set-up costs

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:

• Expansion experts for setup: It’s a good idea to hire expansion experts to help you set up your new entity. The costs will vary depending on the setup's complexity, location, and the experts' experience. However, businesses generally expect to pay between $5,000 and $20,000 for entity setup services. If you are setting up a multinational corporation with subsidiaries in multiple countries, you will need to hire experts familiar with each country's laws and regulations.
• Minimum capital requirements (MCRs): Some jurisdictions require companies to have a specific amount of paid-in capital before they can form and operate. These requirements ensure businesses have sufficient financial resources to meet their initial obligations and operate responsibly. In Germany, for example, the MCR is ∼$27.297 $(€25,000)
• Registration fees: Entity registration fees are usually associated with forming and registering a business entity with the relevant in-country authorities. Registering a new entity can include filing, name reservation, publication, and agent fees, and the costs vary by location. In France, for example, registration fees are ∼$600 (€550)
• Employer registration fees: Employer registration involves notifying the government that you are an employer and will hire employees. This involves filing additional paperwork with the government and paying additional fees. The cost of registering with governmental authorities as an employer can vary depending on the type of business, number of employees, and location of the business
• External legal fees and corporate governance: It's typical for companies to hire legal and accounting professionals with expertise in entity formation to ensure that your business structure is established correctly and complies with all applicable laws and regulations. They can guide you through the incorporation process, from selecting the appropriate entity type to drafting and filing the necessary paperwork. In general, businesses can expect to pay between $2,000 and $5,000 for legal and accounting services during entity setup and an ongoing $500 - $1,000 monthly for corporate governance and secretarial support as your business evolves
• Fees for entity formation documents: You must compile the necessary paperwork to establish the legal framework for the entity's existence, facilitate tax registration and compliance with local tax laws, and obtain business licenses and permits required to operate legally in the foreign jurisdiction. Here are some of the standard documents and their associated fees: 
  
  • Articles of incorporation or bylaws: $200 - $500. These documents outline the basic structure and governance of the entity, including its name, purpose, ownership structure, and management roles. Bylaws establish the rules and regulations for the entity's internal operations, such as voting procedures, meeting requirements, and officer duties
  • Operating and partnership agreement (for LLCs): $200 - $500. This document outlines the specific terms and conditions for the operation of an LLC, including ownership percentages, profit and loss sharing, and member rights and obligations
  • Tax identification numbers: $50 - $100. This includes obtaining an employer identification number or similar tax identification number from the relevant tax authorities. This will also extend to obtaining tax identification numbers for shareholders and directors where appropriate
  • Permits and licenses: $50 - $500. This depends on the type of business and the jurisdiction where it will operate
  • Trademark and intellectual property protection: $500 - $2,000 or more. The documentation here is intended to protect intellectual property rights, such as brand names or inventions created by employees
  • Apostille, legalization, and notary fees: $50 to $500 per document or more. When a company operates internationally, it may need to submit various official documents, such as contracts, invoices, certificates of origin, or court orders, to foreign entities or authorities. Depending on your country of incorporation, this may include translation requirements in addition
• Signature and notarization fees: In some jurisdictions, once you've compiled the necessary paperwork, you must sign and receive a formal acknowledgment that you've properly executed the documents. The fees for notarization vary depending on the jurisdiction and the number of records you have notarized. However, you can expect to pay between $50 and $200 per notarization or more
• Accountancy fees: Engaging accountancy services provides businesses the support they need to assess their financial viability and long-term financial stability when forming an entity. In the UAE, accountancy fees can cost up to $10,000 depending on the volume of transactions and other services required, such as financial forecasting, recordkeeping, financial statement preparation, and tax structuring advice
• Insurance setup fees: When forming a new entity, businesses should take the time to research and select the necessary insurance coverage depending on the location, size, and industry of the new entity to mitigate potential risks and ensure business continuity. Essential insurance coverage typically includes general liability insurance, commercial property insurance, business interruption insurance, workers' compensation insurance, professional liability insurance, and cyber liability insurance. Depending on the coverage type, the initial setup costs range between $50 and $2000 per coverage
• VAT registration fees: Value-added tax (VAT or country equivalent) registration registers a business entity to collect and remit VAT on taxable goods and services sold within a particular jurisdiction. The specific VAT registration requirements and fees vary depending on the jurisdiction. Below are some average registration costs per country:

• Bank account setup fees: A bank account is usually essential for managing the entity's finances, including receiving funds, making payments, and handling payroll. In many jurisdictions, opening a bank account is mandatory for foreign entities operating within the country. Countries have different banking regulations, which can impact the cost of opening a business bank account when establishing a foreign entity. In many cases, setting up a bank account is inexpensive; however, there is a cost associated with researching and selecting the appropriate banking establishment and fulfilling security requirements such as the Know Your Customer (KYC) verification process
• Capital injection into the foreign bank account: Some countries require a capital injection into the new business bank accounts when establishing a foreign entity. For example, Germany requires a ~$27.286 (€25,000) cash injection during incorporation
• Employment agreement fees: Once you've established your own entity, you can legally hire local talent. Companies transitioning out of an EOR model must create their own localized employment agreements that comply with local labor laws and regulations and correctly outline the terms and conditions of employment, ensuring that both parties understand their rights and obligations. Businesses can expect to pay between $750 and $2,500 for a basic employment agreement
• Employee benefit setup fees: To hold up employment agreements, you must establish and administer mandatory benefit plans according to the jurisdiction's statutory requirements. These could include health insurance, life insurance, retirement plans, statutory leave, and time off. The specific employee benefit setup fees will vary depending on the type of plan, the number of employees, the complexity of the plan design, and the service provider. However, in general, businesses can expect to pay anywhere from a few hundred to several thousand dollars in setup fees for each plan
• Entity address registration: While it's not mandatory to have a physical address in every country you establish a local entity, it's generally a requirement to have at least a  service address. In China, for example, foreign entities must have a registered office in China, which is typically the physical address of the entity's representative office or subsidiary. In the UK, however, foreign entities must have a service address in the UK where legal documents can be served on the entity. Registering an entity address can cost anywhere between $500 and $3000

3. When you can guarantee the funds for ongoing HR, payroll, and compliance costs

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.

• HR costs: HR accounts for 1.52% of organizational operating expenses on average.These costs include your HR team's compensation package, payroll taxes, recruitment and onboarding (including drafting employment agreements, revising compliance documents, and registering the employees with local authorities), training and development, and any HR technology used. Alternatively, you could turn to outsourcing your HR function to a local provider, which would cost you between $45 and $1500 per month
• Payroll management costs: Most businesses see payroll costs up to 15-30% of their total revenue. These costs include the salaries and benefits for payroll staff, the cost of payroll software, tax filing, and employment contributions. If you run payroll in numerous countries, you'll need to factor in the costs of hiring a payroll manager in each country to ensure payroll is executed in line with local payroll and local employment laws and regulations. Alternatively, you could outsource your payroll function to a local provider. This will cost between £2 to £25 per employee per month for a basic package that doesn’t include integrated HR and pension plan enrolment

• Compliance monitoring: Large firms report the average cost to maintain compliance can total up to $10,000 per employee. This percentage may be higher for organizations in highly regulated industries, such as healthcare or finance, and lower for organizations in less regulated industries, such as technology or manufacturing. These costs include salaries and benefits of internal compliance staff, compliance software, and services, such as regulatory research, risk assessment tools, and training programs, and legal fees for external counsel and consulting services
• Corporation taxes: When you form a foreign entity, you establish a taxable presence in that country, and local governments will levy a direct tax on the income or profits of your organization to fund a variety of public services, such as education, healthcare, and infrastructure. The cost of corporate taxes can vary significantly depending on several factors, including the entities' location, profitability, revenue, and the applicable tax rates. The average cost of corporation tax in the UK is approximately 25% of a company's profits
• Representation costs: As mentioned above, some countries require entities to have a local representative, resident director, officer, or agent to ensure compliance with local laws and regulations and provide a point of contact for the government. The cost of a local representative for your foreign entity can vary significantly depending on several factors, including the country, the complexity of the business, and the scope of services required
• Physical address costs: If the country or jurisdiction requires you to have a physical address to establish an entity, this will be a significant cost factor. The average cost of office space in major cities can range from $20 to $100 per square foot per year, depending on location. For example, a 1,000-square-foot office in New York City could cost $50,000 per year, while the same-sized office in a smaller city like Austin, Texas, could cost $20,000 yearly. You'll also have to factor in security deposits, insurance, broker fees, utilities, internet and phone contracts, furniture, and equipment costs

4. When you’ve wrapped your head around the set-up process and time investment 

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.

5. When your HR team has mastered local labor laws

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: 

• Minimum wages
• Overtime pay
• Worker classification
• Work hours
• Rest breaks
• Onboarding and offboarding
• Employment agreements
• Union and applicable collective bargaining agreements 
• Employee benefit entitlements such as PTO, parental leave, and pensions
• Probationary periods
• Background checks
• Payment methods
• Payment periods
• Payment schedules
• Payroll taxes
• Payroll records
• Termination
  
  

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.

6. When you’re happy to outsource your payroll function to a local payroll provider

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. 

7. When you’re ready to own your ongoing compliance risk 

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

EOR or entity, you can do it all with Deel

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.