Setting Up a Legal Entity vs. Using an Employer of Record

Two of the most common approaches used by businesses for expansion and hiring staff in a foreign country are the establishment of a legal company and the use of an Employer of Record (EOR). When a company wants to expand into foreign markets and hire new employees, this is often a critical decision that must be made. This choice can have a direct impact on the speed, cost, compliance, and scalability of the international operations.

This article provides a detailed guide to help you evaluate the two alternatives available and make an informed choice that takes into account your business budget, objectives, and long-term goals.

The costs involved in setting up a legal entity

Upfront costs

There are a number of upfront costs associated with the establishment of a legal entity. The country of registration, the sector, and the size of the company influence these costs. Generally, these costs are the registration fees required to formally establish the legal entity with the relevant authorities. Legal and consulting costs may also be incurred for services such as finalizing the incorporation documents, obtaining the necessary permits, complying with local regulations, etc.

Ongoing Operational Costs

In order to keep the legal entity running beyond the initial set-up there are operation costs that have to be taken care of. These include rent or lease payments for office or retail space, utilities such as electricity, water and internet, and maintenance or repair fees for buildings and machinery.

Unexpected Expenses

Unexpected expenses are unforeseen expenses that may arise during the operation of a legal entity and usually cause budget disruptions and require prompt attention. This can include accident or breakdown-related emergency repairs or replacement purchases for machinery, buildings or equipment.

Time and Resource Investment

Setting up and running a local company requires a major time and financial commitment, which can be just as important as ongoing expenditure. Research and planning, including market analysis , feasibility studies and knowledge of local laws, require a lot of time initially.

Using an Employer of Record (EOR)

For companies planning to enter or operate in a new market without setting up a local company, using an Employer of Record (EOR) instead of establishing a legal entity can be a quick solution. An EOR—a third-party company hired on behalf of a client company—legally hires employees and takes care of payroll, taxes, benefits, and compliance with local labor laws. This method saves a lot of time and cost by eliminating the legal and administrative procedures of registering a legal entity.

Cost Efficiency

By utilising an EOR, companies can avoid the high upfront costs associated with company registration — legal fees, filing fees, office set-up costs. The EOR also takes care of ongoing operational costs, such as payroll, tax compliance, HR administration and benefits administration, reducing the need for internal resources or external specialists on site.

Low Unexpected Expenses

Compared to setting up and running a local company, using an Employer of Record (EOR) can save unforeseen costs. Companies are spared any costs resulting from non-compliance with local labour laws, tax regulations and employment standards, as the EOR assumes legal responsibility for employment-related issues. This reduces the likelihood of fines, penalties or legal disputes arising from payroll and tax filing errors or employee misclassification.

Quick Market Entry

EOR already has the legal framework and infrastructure in place to enable companies to start operating in a new market and hire staff within days or weeks. Companies trying to explore a new market, respond to rapid opportunities or grow without delay can particularly benefit from this speed.

Final Thoughts

The specific needs, resources and growth plans of your business will ultimately determine whether you should form a legal organisation or use an EOR like Swapp Agency. A careful evaluation of these elements will help you choose the strategy that best suits your goals and guarantees successful global development.