7 Reasons to Hire Through Your Own Entity (or an EOR)

Let's envision that your business is operating smoothly and successfully. You've expanded globally into multiple markets, established strong brand recognition, gained a deep understanding of your target customer and built strong client relationships. You've also hired a solid and highly-skilled workforce in partnership with an employer of record (EOR). At what point should you consider opening your own local entity?

EOR vs Entity: Challenging Misconceptions

Here, we challenge some common misconceptions and concerns about EORs and entities to empower you to make informed strategic decisions about your global expansion.

Limitations of an EOR

There's a common misconception that an EOR isn't a permanent solution and that you need to set up a local entity before you outgrow an EOR's limits and trigger a local taxable presence or permanent establishment (PE).

In reality, very few countries have firm laws regarding EOR limits. In fact, using an EOR is the official employer of your workforce mitigates your PE risk.

Taxation and permanent establishment risks

You may fear that certain business activities carried out in a foreign country will attract undue attention from local tax authorities. However, as the EOR exports the service from the employing country to another location, the tax authorities aren't interested in many business activities. For instance, an engineer's work is unlikely to trigger PE as the service doesn't generate revenue within in the country. However, employers should be aware that if an employee hired through an EOR interacts directly with the local market, the EOR will invoice you for VAT as the client company.

Often, tax authorities look favorably upon EOR arrangements since they are heavily regulated and are responsible for withholding and remitting taxes to local tax authorities. EORs ensure that all required taxes and employer contributions are paid directly to the local government in a compliant and timely manner.

Cost-effectiveness

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, this assumption fails to acknowledge that an EOR is more than a talent acquisition solution. Comprehensive EORs also serve as global payroll providers, HR departments, and robust compliance solutions.

Once a company opts out of an EOR agreement, it must build out its own operations in every country they want to hire in. This incurs a significant ongoing time and financial investment. Alternatively, an EOR partner like Deel can support your organization across 150+ countries through its wholly-owned entities.

7 Reasons to open your own entity

With common misconceptions about EORs debunked, should you consider opening your own entity? If so, when? Here are 7 key indicators that you may be ready to open your own entity.

When you’ve finished testing new markets and want to establish a physical presence 

If you have confidence in your long-term success within 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.

There are certain factors that can help you anticipate your chances of success, including:

• The availability of local talent
• A promising market size
• Stable market growth
• Increasing demand
• A safe, competitive environment

You can never guarantee your success in a particular market due to impact of the constant evolution of local and global markets and economies, the emergence and strength of competitors, and your changing business needs. However, companies that are agile and adapt to change are more likely to succeed in the long term.

Comprehensive EOR services like Deel allow you to quickly enter and new global markets where you identify opportunities, with the flexibility to withdraw quickly and easily if necessary. This speed and 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, you can choose to set up your own foreign entity with the support of our in-house experts, or continue with our comprehensive EOR model.

Deel has supported Telin's global expansion, significantly reducing its costs and time to hire and onboard.

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

The cost of setting up a new foreign entity depends on several factors, including the country, the type of entity, the number of employees, and local compliance requirements. For example, Deel estimates that a US business establishing a new UK entity can generally expect to pay $78,000 to $128,000 USD in total setup costs.

With Deel's free Entity Setup Calculator, you can anticipate the cost-effectiveness of establishing a foreign entity. Select your target location, number of employees, and whether you require additional services for a tailored estimate of both initial costs and ongoing costs for maintenance and administrative ownership. The calculator provides a price comparison with Deel's EOR services, which incur an ongoing monthly fee( but no upfront setup costs.

Cost breakdown

Organizations should anticipate the following costs when setting up a new foreign entity. Fees and requirements vary depending on where your business is located and where you plan to set up a subsidiary.

• Expansion experts for setup: Expansion experts ensure a compliant and streamlined entity setup process. If you're setting up a multinational corporation with subsidiaries in multiple countries, you'll need to hire experts familiar with each country's laws, regulations, and compliance requirements. Costs vary based on the setup's complexity, location, and the experts' level of experience. For example, US employers establishing a UK entity expect to pay between $1,000 and $3,000 USD for their expertise.
• 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. For example, the MCR in Germany is ∼$27,903 USD (€25,000)
• Registration fees: Businesses usually incur entity registration fees when forming and registering an entity with the relevant in-country authorities, including filing, name reservation, publication, and agent fees. The costs vary between countries, and may depend on company size, sector, and the registration method (online or virtual).
• Employer registration fees: Employer registration involves notifying the government that you're an employer and will hire employees. Fees are determined by the type of business, number of employees, and location. For example, a US employer usually pays between $1,000 and $3,000 USD to register its entity with the UK government.
• 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. Employers should anticipate the cost of legal and accounting services during entity setup, as well as ongoing fees for corporate governance and secretarial support as your business evolves. Rates vary.
• 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. The fees vary between jurisdictions. Here are some of the standard documents: 
  • Articles of incorporation or bylaws: 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): 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: This includes obtaining an employer identification number or similar tax identification number from the relevant tax authorities. This extends to obtaining tax identification numbers for shareholders and directors where appropriate
  • Permits and licenses: The permits and licenses required depend on the type of business and the jurisdiction its operational scope
  • Trademark and intellectual property protection: This is intended to protect intellectual property rights, such as brand names or inventions created by employees
  • Apostille, legalization, and notary fees: 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 Some countries of incorporation require the professional translation of these documents into their official language
• Signature and notarization fees: Some jurisdictions require the signature and formal acknowledgment from a notary that your documents are valid and correct. Fees vary depending on the jurisdiction and the number of records you need notarized
• Accountancy fees: Engaging accountancy services provides businesses with the support they need to assess their financial viability and long-term financial stability when forming an entity. It also incurs significant fees, which depend on your transaction volume and whether you require financial forecasting, recordkeeping, financial statement preparation, tax structuring advice, or other services
• 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
• VAT registration fees: Registering for Value Added Tax (VAT) or the country's equivalent permits a business entity to collect and remit VAT on taxable goods and services sold within a particular jurisdiction. Specific VAT registration requirements and fees vary between jurisdictions
• 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. Setting up a bank account is usually inexpensive, but there are costs 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, requiring at least half this amount be deposited upon registration
• 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
• 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, foreign entities must have a service address in the UK where legal documents can be served.

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.

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

In addition to the initial costs associated with setting up a foreign entity, businesses also need to budget for ongoing expenses. These include accounting, tax, payroll processing, and benefits administration, together with governance and compliance with local labor laws. 

An EOR takes care of these responsibilities on your company's behalf, allowing you to focus on your core business activities. But, when you transition to your own entity, your organization assumes these costs. You're also unlikely to benefit from any discounts or deals the EOR receives through its partnerships with insurance providers and integration partners.

Here's a breakdown of the average ongoing costs of running a foreign entity. 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. You can use [Deel's Entity Setup calculator] to estimate the ongoing costs your organization will incur.

HR costs

On average, HR accounts for 1.47% of organizational operating expenses, including (but not limited to) costs associated with:

• Training and development
• HR technology
• Your HR team's compensation package, and
• Talent acquisition and onboarding, including drafting employment agreements, revising compliance documents, registering employees, and more

Payroll management costs

Payroll management costs most businesses between 15% and 30% of their total revenue. This includes:

• Salaries and benefits for payroll staff
• Payroll software
• Tax filing
• Employment contributions

If you run payroll across numerous countries, you'll need to factor in the cost of hiring a payroll manager in each country to ensure compliance with local payroll and employment laws.

The estimated total ongoing payroll administration costs for a business in the UK are:

• $56,000 to $65,000 USD per year with an entity
• $7,188 per year with an EOR like Deel

Compliance monitoring costs

The average yearly cost to maintain compliance can be upwards of $10,000 per employee within highly regulated industries such as healthcare and finance. Companies in less regulated industries tend to spend less. In addition to the internal compliance team's salary packages, the budget is assigned to software and services, such as:

• Regulatory research
• Risk assessment tools and training programs
• Legal fees for external counsel and consulting services

Corporation taxes

When you form a foreign entity, you establish a taxable presence in that country. As a result, most local governments will levy a direct tax on your organization's income or profits to fund local infrastructure and public services such as education and healthcare. Corporate tax rates vary significantly, based on factors such as the entity's location, profitability, revenue, and sector. For example, the main rate of UK corporation tax is 25%, which is levied on a company's profits.

Local representatives

Some countries require entities to appoint a local representative, resident director, officer, or agent. It aims to ensure that businesses comply with local laws and regulations, and provides a point of contact for the government. The cost of appointing a local representative for your foreign entity can vary significantly, based on location, the complexity of the business, and the scope of services required.

Physical address establishment

A local physical address is a requirement of entity setup in some countries and jurisdictions, which incurs significant investment in real estate. In addition to rental fees, organizations need to anticipate the cost of security deposits, insurance, broker fees, utilities, internet and phone contracts, furniture, and equipment costs.

By using an EOR service such as Deel's all-in-one global payroll, HR, and compliance solution, companies can avoid the compliance risk and expenses associated with maintaining their own overseas legal entity.

If you already own foreign entities, Deel can support your consolidated entity management. Add your entities into Deel and standardize your global payroll reporting, HR, and workforce compliance with our single, centralized platform.

Strada unified its US payroll and global hiring and saved over $10,000 USD with Deel.

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

Organizations setting up a new foreign entity need to follow multiple time-consuming steps before making their first local hire. By contrast, when you partner with an EOR provider, you skip past all the bureaucracy, and can start hiring global employees immediately.

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

The steps outlined may vary between countries and entity types, but obtaining the necessary government filings and approvals is often a lengthy and inefficient process. Unexpected issues with applications, such as missing documents or incomplete information, can further slow down the approval process.

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.

Nium saved 12+ months when expanding into a dozen new geographies with Deel.

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.

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.

With Deel, Finder reduced HR admin by 20% and cut onboarding times in half.

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

When using an EOR, in-house experts navigate complex local regulations to manage payroll on your behalf in every country you operate in. However, you assume responsibility for this weekly, bi-weekly, or monthly task if you form a local entity.

Instead of hiring or training an internal team on local payroll and tax regulations and rates, available payment methods, currency exchange rates, and filing and payment deadlines, most businesses opt to outsource their payroll function to a local provider.

However, using several siloed local payroll providers can complicate global payroll for businesses that operate across multiple countries. This incentivizes some companies to hire a payroll aggregator that uses external third-party partners to process payroll locally. However, the quality and accessibility of the support is inconsistent.

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

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 with global payroll expertise like Deel can help you streamline payroll across 100+ countries with one, unified platform. Eliminate the ongoing admin of local compliance, taxes, benefits, and more.

With Deel, you can automatically sync employee details from your HR platform and onboard your international team members 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.

EORs like Deel take full responsibility for your compliance with local and global laws and regulations. They ensure that:

• Employment contracts are vetted by legal experts and updated quarterly since labor laws are constantly changing 
• 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

Our Compliance Hub gives you access to the latest regulatory updates and risk warnings, offering compliance guidance and actionable alerts.

EOR or entity–you can do it all with Deel

Choosing if, and when, to set up your own entity is a complex strategic decision. It requires:

• Your total confidence in the local market
• The capital to cover upfront setup and ongoing running costs
• The flexibility to allow for a lengthy setup process
• Access to specialized HR, payroll, and compliance experts

The alternative is a comprehensive employer of record solution. With legal entities in 150+ countries, Deel empowers you to hire and onboard top global talent at speed, and streamlines your compliance and payroll administration.

If you choose to set up a foreign subsidiary, Deel provides entity setup services and Global Payroll support. Our unified platform gives you the flexibility to customize your strategic global approach, based on your requirements in each location.

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