When expanding into new countries, one of the most important decisions a company must make is how to legally employ people. The two most common options are setting up a local legal entity or using an Employer of Record (EOR).
Each model comes with different costs, timelines, risks, and long-term implications. This article provides comprehensive insights into both approaches, helping business leaders, HR teams, and finance executives make informed decisions based on strategy, budget, and compliance needs.
Understanding the Two Models
What Is a Local Legal Entity?
A local legal entity is a formally registered business presence in a foreign country, such as a subsidiary, branch office, or local corporation. Once established, your company becomes the direct legal employer responsible for all employment, payroll, tax, and compliance obligations.
What Is an Employer of Record (EOR)?
An Employer of Record (EOR) is a third-party organization that legally employs workers on your behalf in a foreign country. While your company manages day-to-day work and performance, the EOR handles employment contracts, payroll, taxes, benefits, and compliance under local law.
Cost of Setting Up a Local Entity
Setting up a local entity involves both one-time setup costs and ongoing operational expenses.
1. One-Time Setup Costs
These costs vary by country but commonly include:
- Company incorporation and registration fees
- Legal and consulting fees
- Notary and documentation costs
- Local bank account setup
- Licensing and regulatory approvals
In many countries, entity setup can cost $10,000–$50,000+ and take several months.
2. Ongoing Operational Costs
Once the entity is established, recurring costs include:
- Local accounting and bookkeeping services
- Payroll processing and tax filings
- Corporate tax compliance and audits
- Statutory reporting and filings
- Local HR, legal, and finance staff
- Office lease and administrative overhead (in some markets)
These ongoing costs can easily reach thousands of dollars per month, regardless of how many employees you have.
3. Compliance & Risk Costs
Operating a local entity also introduces compliance risks:
- Penalties for late or incorrect filings
- Employment law violations
- Payroll tax errors
- Misclassification or improper termination
Managing compliance often requires local experts, increasing both cost and complexity.
Cost of Using an Employer of Record (EOR)
The EOR model replaces entity-related costs with a predictable, per-employee pricing structure.
1. EOR Pricing Structure
EOR providers typically charge:
- A monthly fee per employee (commonly $300–$800)
- This fee usually includes payroll, taxes, benefits administration, and compliance
There are no incorporation fees, no need for local accountants, and no entity maintenance costs.
2. What’s Included in EOR Costs
EOR fees generally cover:
- Locally compliant employment contracts
- Payroll processing in local currency
- Income tax and social security contributions
- Statutory and optional benefits administration
- HR compliance and employment law support
- Employee onboarding and offboarding
As a result, costs are transparent and scalable.
3. Hidden Cost Reduction with EOR
Using an EOR significantly reduces indirect costs such as:
- Legal risk exposure
- Time spent managing compliance
- Internal HR and legal workload
- Delays in market entry
For small teams or market testing, EOR is often far more cost-effective.
Key Cost Comparison: Local Entity vs EOR
| Cost Factor | Local Entity | Employer of Record (EOR) |
|---|---|---|
| Setup Cost | High | None |
| Time to Hire | Months | Days |
| Ongoing Admin Cost | High | Included |
| Compliance Risk | High (self-managed) | Low (EOR-managed) |
| Scalability | Complex | Easy |
| Cost Predictability | Low | High |
Steps Involved in Each Approach
Steps to Set Up a Local Entity
- Market and legal feasibility study
- Company incorporation and registration
- Tax and payroll registration
- Bank account opening
- Hiring local advisors
- Employment contract creation
- Ongoing compliance management
This process can take 3–12 months, depending on the country.
Steps to Hire Using an EOR
- Select target country and role
- Engage an EOR provider
- Issue compliant employment contract
- Onboard employee
- Start payroll and benefits
This process can take days or weeks, with minimal internal effort.
Risks to Consider
Risks of Setting Up a Local Entity
- High upfront investment with uncertain ROI
- Long setup timelines delaying market entry
- Regulatory and compliance exposure
- Difficulty exiting the market if plans change
Risks of Using an EOR
- Higher per-employee cost at large scale
- Less flexibility in customizing employment terms
- Not suitable for all regulated industries
However, these risks are often manageable and outweighed by speed and compliance benefits.
Best Practices for Choosing the Right Model
To make the right decision, consider:
- Team size: EOR is ideal for small to mid-sized teams
- Market maturity: Use EOR to test new markets
- Timeline: Choose EOR if speed is critical
- Compliance complexity: High-risk countries favor EOR
- Long-term plans: Entities make sense for permanent, large-scale operations
Many companies adopt a hybrid approach—starting with an EOR and transitioning to a local entity once the market proves successful.
Global Compliance Considerations
Regardless of the model, global compliance is critical:
- Employment laws vary widely by country
- Payroll and tax rules change frequently
- Termination and severance regulations are strict
An EOR provides built-in compliance expertise, while entities require ongoing investment in local legal and HR resources.
Conclusion: Making an Informed Decision
Choosing between setting up a local entity and using an EOR is a strategic decision that impacts cost, speed, compliance, and risk.
- Local entities offer long-term control but require significant investment and compliance management
- EOR solutions provide speed, flexibility, and predictable costs with minimal risk
For many companies, especially during early expansion, EOR is the most efficient and cost-effective option.
Final Takeaway for Decision-Makers
This guide is designed to help business leaders, HR teams, and finance professionals evaluate costs, understand risks, and apply best practices when expanding globally.
By aligning your hiring model with your growth strategy, you can expand internationally with confidence, compliance, and control.