EOR vs Legal Entity: What’s Best for You?

If you have decided to expand your business footprint on a global scale, you’ll also need to decide if you want to establish a legal entity or use EOR services to hire international employees. In this blog, we’ll set the record straight on what an EOR and legal entity are, their differences, and any costs involved. So, stay tuned if you want to make an informed decision about your business growth!

What are an EOR and a legal entity?

An Employer of Record (EOR) is a third-party service that helps businesses hire and manage employees in other countries without needing to set up their own office or legal entity there. The EOR becomes the official employer for legal and tax purposes, handling things like payroll, taxes, compliance, and contracts.

A legal entity, on the other hand, is a formal company structure that businesses establish in a specific country to operate there permanently. It allows the company to hire employees directly, sign contracts, open bank accounts, and handle local business operations. However, running these administrative tasks requires more effort and not to mention significantly more costs.

Key differences between EOR and Legal Entity

The differences between EOR and opening a legal entity mostly come from how legal aspects are managed and the time and resources needed. Below, we’ll shed light on these differing factors.

Flexibility and Scalability

An EOR allows you to test the waters in a new market without much commitment. This enables you to check if the market is favourable for your business before investing. Plus, if things don’t match your expectations and needs, you can easily set your hiring efforts towards a new target country. 

Establishing a legal entity has greater liability. For example, in some countries, you might have to pay pensions for the rest of the employees’ lives and spend a lot of time and money on closing the entity. 

Compliance and risk management

Setting up a legal entity means the burden of managing compliance and legal risks falls only on your back. You’ll need to have comprehensive risk management in place and expertise in local and international regulations.

If you partner up with an EOR, the EOR will act as the legal employer for your workforce while you handle your employees’ daily management. This shared responsibility reduces compliance risk and allows you to scale without worrying about any legal fines. 

Time and resource investment 

Going through with the legal entity establishment will take up much valuable time. In the UK, for example, it can take 1 month to establish a legal entity before you can hire employees. This process involves navigating legal requirements, registrations, and administrative tasks.

In contrast, using an EOR is much faster. With an EOR, you can start hiring employees in just a few days, saving time and allowing you to focus on growing your business rather than dealing with setup complexities.

Who should consider an EOR?

An EOR is a flexible solution for businesses of all sizes looking to hire internationally. It’s particularly beneficial for startups, which often lack the resources to handle the high costs and complexities of establishing legal entities in multiple countries. 

Small and medium-sized enterprises also stand to gain significantly from using an EOR. These companies often operate with limited resources and benefit from avoiding the time and expense of managing legal and payroll requirements across borders. In addition, companies testing new markets can skip the time-consuming process of setting up a legal entity and quickly hire employees.

Who should consider establishing a legal entity?

Establishing a legal entity is ideal for organisations with the resources and expertise to handle the complexities of operating in a foreign market. These large businesses often have in-house legal, HR, and finance teams, eliminating the need to outsource such sectors. 

This approach allows them to create a permanent local presence and build strong brand recognition. It’s a strategic move for organisations planning long-term investments in a specific market or expanding their physical operations.

Cost comparison: EOR vs legal entity

The EOR costs are predictable, as they typically have a flat rate per employee. On the other hand, opening and managing a legal entity entails set-up fees and sometimes even hidden costs like penalties for non-compliance. The exact amount depends on where the legal entity is established and the legal requirements. 

Here’s a breakdown of the estimated costs of opening a legal entity in the US compared to the straightforward pricing of using an EOR.

If you want to establish a legal entity in Spain, you’ll need to plan the following costs in your budget.

Establishing a legal entity in the US or Spain involves significant upfront and ongoing expenses that can quickly add up. In the US, the total cost of forming an LLC ranges from approximately $300 to $1,000, depending on the state. Spain, however, requires a much larger financial commitment, with costs averaging between €3,400 and €4,300, primarily due to the mandatory €3,000 minimum share capital deposit.

These figures only cover the basic setup. Hidden costs, such as late fees, penalties for non-compliance, and employee-related legal settlements, can further escalate expenses, creating unpredictability that may strain your budget.

With a transparent fee of just €79 per employee per month, Native Teams allows you to eliminate any entity set-up costs along with the risks of fluctuating costs and compliance penalties. This enables you to quickly expand your business and team as well as test new markets without much commitment. 

You might be interested in learning about the costs of legal entity in Croatia vs EOR.

To wrap up

Choosing between establishing a legal entity and using an EOR is a decision that depends on your company’s goals, budget, and long-term plans. Understanding what aligns with your current needs and future growth strategy is essential to making the right choice.

If you’re looking to expand globally with minimal risk and predictable costs, an EOR like Native Teams might be the perfect solution. Book a demo call today and see how we can simplify your global expansion!