Cost Comparison: EOR vs. Opening an Entity

Of the many strategic decisions you have to make during global expansion, determining how you’ll hire global talent is one of the most important. Do you use an employer of record (EOR), or establish your own legal entity and hire employees directly?

Usually, the decision comes down to cost. 

Creating a legal entity in a foreign country incurs significant expenses due to legal, compliance, governance, and administrative processes, as well as industry-specific requirements. On the other hand, opting for an EOR service provider is often more cost-effective since they already have legal entities established.

Let's take a closer look at the typical costs related to global expansion and how they differ when using an EOR company versus setting up a local entity.

Disclaimer: This content is provided for informational purposes only and should not be considered legal or tax advice. Please consult with professionals for guidance before taking any action.

Upfront costs

There are considerable upfront costs required to open a foreign entity. This includes paying setup fees, registrations, hiring legal, accounting, regulatory and expansion experts, and meeting minimum capital requirements. 

There are also indirect costs, such as closing down a virtual or physical office, legislation and translation of documents, notary fees, courier fees, IPR, corporate secretarial, and more. These requirements can be a significant financial hurdle for any team, especially startups and companies with budget constraints. 

While the cost of EOR services varies depending on the provider, the upfront costs are typically low as there are no entity setup fees required. Instead, EOR platforms usually charge a service fee per employee. These fees are typically more predictable than entity management fees, which can vary based on the business structure and regulatory requirements.

Compliance costs

Managing compliance for an entity requires continuous investment in legal consultations and other measures to navigate changing regulations. The responsibility falls squarely on the business, requiring oversight from in-house experts or outsourced practitioners that can cost hundreds of dollars per hour or thousands per month on retainer.

EORs provide client companies with built-in compliance management and in-house expertise. At Deel, this includes legal experts. This proactive approach reduces compliance risks and the associated fines and legal penalties, which typically cost 2.71 times more than maintaining compliance.

Administrative and operational costs

To support your new workforce, you'll need HR, finance, compliance, audit, and legal teams.

If you decide to set up an entity yourself, you can build an internal team by recruiting and training dedicated personnel who will handle payroll, HR, employee benefits, and more. This approach will give you direct control over your HR and payroll processes, but it also comes with the responsibility of investing time and resources in team development.

Forming and managing this team on your own can be costly. For instance, organizations in Canada with fewer than 500 employees spend an average of $1,289 (CAD) on HR for each full-time employee, excluding payroll staff. That’s $386,700 for a team of 300. 

Alternatively, you can outsource these tasks to local HR and payroll providers. This approach takes less time but still requires additional resources and investment, as you may need to find a new provider for each entity you open.

By partnering with a global EOR, you can keep a low headcount, reduce the administrative burden on your existing team, and grow your company without having to manage multiple HR and payroll systems.

Flexibility and scaling

EOR solutions offer maximum flexibility for businesses looking to scale operations globally and test new markets without the commitment of opening an entity.

Opting for an EOR ensures a quick setup process, allowing businesses to focus on their core activities without the delays associated with legal and administrative procedures. For example, setting up an entity to hire employees in the UK typically takes one month, whereas hiring employees in the UK with Deel’s EOR takes two days. 

As an all-in-one platform, Deel can support your company through every stage of growth. You can use our EOR model, hire independent contractors, or open an entity and run Global Payroll, all in one platform.

Exit costs

Dissolving an entity can involve long legal processes and financial implications, making the exit strategy a crucial consideration for long-term planning. For example, it takes at least three months to dissolve a company in the UK, not including any preparatory work. 

The exact cost of closing an entity will depend on a wide variety of factors, including the length of existing contracts, the route to closure, outstanding liabilities, staff, debts due, and shareholder or member structure.

On the other hand, exiting an EOR arrangement is generally more straightforward. An EOR allows businesses to transition more seamlessly, with fewer legal complications and potentially lower exit costs. This process is streamlined further with Deel, as you can transition from one product to another without switching providers.

Risk management

Establishing an entity places the onus on your business to manage compliance and legal risks independently. This requires a risk management strategy and a deep understanding of local and international regulations.

When you employ top talent with an EOR, they become the legal employer of your workforce, while you retain day-to-day management responsibilities. This shared model helps distribute risk and ensures that businesses are not solely burdened with navigating legal and regulatory landscapes.

Cost comparison: Own entity vs. employer of record services

Companies using an EOR to hire employees do not have to set up entities themselves, therefore they do not pay entity set-up fees. For companies setting up entities independently, the exact cost will depend on the entity’s location, number of employees, and compliance requirements. 

Here’s an estimate of the employer costs (USD) required to set up an entity in the UK compared to using an employer of record. 

Note: These costs are subject to change depending on the employer and employees' needs. For example, legal fees may arise if employees have questions about their employment agreements or employment laws.

Ongoing global payroll administration costs

After your company sets up an entity, you will be responsible for paying additional, ongoing costs as you hire new employees and expand your global workforce. Below is an example of the estimated costs a UK company may encounter.

In total, the estimated costs of setting up an entity can range from $78,000 to $128,000, whereas the estimated cost of using an EOR is $7,188.

Manage all entities in one place with Deel EOR

As an all-in-one platform, Deel streamlines compliance with local labor laws, tax regulations, and HR requirements in multiple countries, reducing the burden of legal and regulatory complexities for global teams.

Deel’s EOR pricing structure starts at $599/month and includes:

• Handling local payroll services, benefits administration, taxes, and compliance
• Competitive benefits packages tailored to each country
• Support from local HR and legal experts
• 20+ integrations for HR, Finance, and more

When clients move from the EOR model to owned entities, Deel can continue supporting them with Entity Setup services and Global Payroll. Clients can use multiple Deel services to fit their needs, using the EOR model for some locations and Global Payroll for others, as well as hiring independent contractors. 

To discuss your options with an expert, book a 30-minute demo with our team today.