As small and medium-sized businesses (SMBs) expand their operations into new markets, they often face the decision of how to establish a presence in a new location. This decision can be particularly challenging for businesses looking to operate in foreign countries, as it can be difficult to navigate the complex legal and regulatory frameworks in each new market. Two common approaches to establishing a presence in a new market are using an Employer of Record (EOR) service or setting up a local entity.

In this article, we will compare and contrast these two options to help SMBs determine which approach is right for them.

Setting Up a Local Entity

Setting up a local entity is the process of establishing a legal presence in a new market, such as a subsidiary or branch office. This approach requires the business to navigate the local legal and regulatory framework, including registering with local authorities, obtaining necessary licenses and permits, and complying with local labor laws — among other things.

Advantages of Setting Up a Local Entity

One advantage of setting up a local entity is the economy of scale in the long term for businesses seeking to employ a significant workforce in a jurisdiction. Once the entity is established, the business can dictate the policies and processes. Additionally, because the business is responsible for all administrative tasks related to employment, it can potentially save money on fees charged by an EOR service — which is a consideration if you are to employ hundreds or thousands of team members.

Another advantage of setting up a local entity is that it provides more flexibility in the new market. Because the business is responsible for all administrative tasks related to employment, it can make changes to its employment policies or practices more easily than if it were using an EOR service. 

Disadvantages of Setting Up a Local Entity

However, setting up a local entity is generally a very complex and time-consuming process, particularly in foreign markets with unfamiliar legal and regulatory frameworks. This can make it challenging for SMBs with limited resources to establish a presence in a new market using this approach. Additionally, setting up a local entity requires a significant upfront investment, including legal and accounting fees, office space, and equipment. A conservative estimate puts the average cost of establishing a legal entity in a foreign market at $15,000 to $20,000, with some markets easily reaching into six figures. 

Another potential drawback of setting up a local entity is that it exposes the business to legal and regulatory risks. Because the business is responsible for all administrative tasks related to employment, it must ensure compliance with local labor laws, tax regulations, and other legal requirements. This can be a daunting task, particularly in foreign markets where the legal and regulatory environment may be less familiar. What’s more, failure to comply with these regulations can potentially result in financial and reputation damages which could be very costly. 

Finally, the process of setting up a local entity can be very slow — and difficult to wind down. Generally it takes between three and six months for an organization to establish a branch in a new country, involving everything from legal processes to setting up bank accounts and registering for social security and local authorities. This is a huge drawback for companies who want to move fast and scale quickly. What’s more, if things don’t work out, the process of winding down a local entity can be expensive and challenging. 

Employer of Record (EOR) Services

An EOR service is a third-party provider that acts as the employer of record for a business's employees in a new market. This means that the EOR service takes on all legal and regulatory responsibilities associated with employment in that market, including payroll, taxes, benefits, and compliance with local labor laws. The business continues to manage its employees' day-to-day work, but the EOR service handles all administrative tasks related to employment.

Advantages of EOR Services

One major advantage of using an EOR service is that it allows SMBs to hire remote workers in a new market quickly and easily. Because the EOR service handles all administrative tasks related to employment, the business does not need to spend time and resources setting up a local entity and navigating the local legal and regulatory framework. This can save SMBs a significant amount of time and money, allowing them to focus on growing their business in the new market.

Another advantage of using an EOR service is that it allows SMBs to avoid many of the legal and regulatory risks associated with operating in a new market. Because the EOR service is responsible for ensuring compliance with local labor laws, the business does not need to worry about making costly mistakes that could result in fines or legal action. This can provide peace of mind for SMBs, allowing them to focus on their core business activities without worrying about compliance issues.

Disadvantages of EOR Services

There are also some potential drawbacks to using an EOR service. One is that it can be more expensive than setting up a local entity, particularly over the long term for companies looking to hire large workforces in a given country. Because the EOR service is responsible for all administrative tasks related to employment, it charges a modest fee for its services. Over time, these fees can add up, making an EOR service more expensive than setting up a local entity.

Another potential drawback is that using an EOR service can limit a business's flexibility in the new market. Because the EOR service is responsible for the processes related to employment, it may be less straightforward to make changes to its employment policies or practices.

EOR Services or Setting Up an Entity: Which Is Right for You?

So which approach is right for SMBs looking to establish a presence in a new market? The answer depends on a variety of factors, including the size and scope of the business, the nature of its operations in the new market, and its resources and capabilities.

For growing SMBs branching out into new markets, EOR services are likely the best option. This approach can provide a quick and easy way to establish a presence in a new market while minimizing legal and regulatory risks. Additionally, because the EOR service handles all administrative tasks related to employment, the business can focus on its core activities, such as sales and marketing.

For larger businesses who are less concerned about the start-up costs of establishing a new presence — and who might want to employ large workforces in a new country — setting up a local entity may be the best option. This approach provides more customizability over processes, and may prove more cost effective in the long term.

The following gives an overview of some key considerations:

EOR Services — Get Started Today

In summary, both Employer of Record (EOR) services and setting up a local entity have their advantages and disadvantages for SMBs looking to establish a presence in a new market. An EOR service is a quick and easy way to get started in a new market, giving scaling businesses the chance to broaden their horizons and hire full-time employees in new markets. 

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To start growing your team through EOR Services today — for as little as $299 per employee, per month — speak to one of our EOR experts.