Transitioning from an EOR to legal entity
December 13, 2023
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Transitioning from an employer of record (EOR) to legal entity is a natural progression during the global expansion journey. Using an EOR is a cost-effective strategy to building your global workforce. But long-term international expansion often requires businesses to set up their own local legal entity.
Although using an EOR is highly beneficial for growing companies, setting up a legal entity might be the next chapter in your growth journey. As business activity and hiring in a market develops, it might be time to strengthen your commitment. Hiring local workers directly will empower your business to take full control over your expansion initiatives.
But can a business know the right time to transition from an EOR to a legal entity? Sometimes it simply depends on the country and their local employment laws. Other times, it may depend on the cost of operation. This guide will help you navigate important factors to determine the right time to set up your own international entities.
What you need to know about transitioning from an EOR to legal entity
- Recognizing the signs of growing pains
- Understanding the scope of setting up your own foreign entity
- Overcoming the common challenges of international incorporation
- Preparing for the switch from EOR to legal entities
- Making the transition to your own entity
Signs to transition from an EOR to legal entity
Four main indicators will be a signal for businesses as they continue to grow and scale their global operations.
- Growing number of employees: Depending on the country and its incorporation requirements, hiring more workers with an EOR can become more expensive than establishing your own local presence.
- Local restrictions: In some countries, an employer of record is meant to be leveraged as a temporary solution. This is in part because local authorities want to ensure they can collect the proper corporate and indirect taxes from your business.
- Permanent establishment risk: In order to stop certain tax liabilities from affecting your operations, you would need to create a separate legal entity in any country where it generates revenue.
- Scaling limitations: Becoming fully operational in a new market, including opening facilities, importing goods or sponsoring employee visas, usually requires a local legal entity.
The scope of setting up your own foreign legal entity
Many pieces factor into the decision to shift from employing workers internationally through an EOR to directly with your own legal entity. Employer of record services offer advantages like flexibility and access to local HR experts for compliance and administrative assistance, whereas having your own entity grants more control and potential cost savings over the long term.
The ebook explores the advantages and expectations of incorporation, including:
- Branding opportunities
- Strategic outlook
- Complexity considerations
- Initial investment
- Risk and accountability
Common challenges of international incorporation
A lot could go wrong when switching from hiring internationally with an EOR to setting up your own legal entity in a foreign country. Understanding some common challenges will help streamline your incorporation.
These seven common pitfalls are covered in greater detail in the ebook:
- Lack of proper preparation
- Switching employee benefits
- Payroll registration
- Payroll management
- EOR contract clauses
- Payroll information gathering
- Outstanding payments and accrual payouts
How to prepare for the switch from EOR to legal entity
This will provide a condensed overview of measures to consider during your transition from an EOR to legal entity. It's important to note that the quantity and categories of legal entities differ from one country to the next. Preparing to become a legal employer for your global teams is a time-consuming, but necessary part of the process.
The ebook provides a more comprehensive checklist for your transition, but here is a quick overview:
Establish your local presence
- Determine your legal entity structure
- Create a local bank account
- Establish your legal entity
Fulfill employer obligations
- Review the EOR contract
- Create new global employment contracts
- Draft and issue notifications
- Provide statutory benefits
- Provide locally appropriate supplementary benefits
- Protection of employee data
- Draft and issue local HR policies for all international employees
- Obtain a work permit sponsorship (if applicable)
- Review existing salaries (optional)
Fulfill corporate and indirect tax obligations
- Understand corporate tax requirements and register with local tax authorities
- Document intra-group financing
- Perform a transfer pricing assessment
- Understand local indirect tax (VAT/GST) requirements and register with local indirect tax authorities
Work with Safeguard Global to transition from an EOR to legal entity
Having the right partner can make all the difference when switching from an employer of record to your own legal entity. The challenge is that many EOR providers don’t also offer incorporation services. And finding qualified businesses that understand the EOR transition requirements prior to entity setup is another obstacle to success.
Safeguard Global fully supports international growth in 170+ countries. From our own employer solution, GEO, to entity incorporation services—as well as global recruiting, payroll, tax and accounting services—we offer a comprehensive approach and seamless support for growing companies.
Contact us today to learn more about how we can help you meet your global expansion objectives.