When your business starts growing into new states or countries, you eventually hit a wall. How do you actually pay people legally? You usually have two choices. You can go through the long process of setting up a local office yourself, or you can partner with an Employer of Record.
Many business owners find themselves stuck trying to decide between an EOR and setting up a legal entity because both paths have very different costs and timelines. Setting up an entity means you own the whole structure, but an EOR lets you start hiring almost instantly.
Understanding which one fits your specific goals is the only way to avoid a massive administrative headache later on.
What Is an Employer of Record (EOR)?
An EOR is a third-party organization that becomes the legal employer of your workers in a specific location. They handle all administrative tasks like payroll, taxes, and labor law compliance, while you still manage the employees’ work every day. You don’t need to register a business in that state or country because the EOR already has one. It is essentially a way to outsource your legal and HR liability so you can focus on your actual business goals. This is a common shortcut for companies that want to find great talent without the paperwork.
Understanding a Legal Entity
A legal entity is a company that you register with the local government. This could be a branch, a subsidiary, or a completely new corporation. When you set up an entity, you are the one responsible for everything. You have to open local bank accounts, register with tax authorities, and hire your own HR team to make sure you are following local rules. It gives you total control, but it also means you carry all the risk and the administrative burden on your own back. It is a permanent commitment to a specific region.
Comparing an EOR and a Legal Entity
Choosing between these two paths depends on how much time and capital you want to invest upfront. One is built for speed and flexibility, while the other is built for long-term, high-volume ownership. Here is how they actually stack up in a side-by-side look.
- Timeline and Speed: An EOR allows you to hire in days or weeks because the legal structure is already in place. In contrast, setting up your own legal entity is a marathon that can take months or even a full year, depending on the local government’s backlog.
- Upfront and Ongoing Costs: The initial cost for an EOR is relatively low, usually consisting of predictable service fees. If you choose the entity route, be prepared for high upfront legal, registration, and consulting fees, along with the cost of maintaining a local physical presence.
- Compliance and Legal Duties: With an EOR, the partner takes the lead on following labor laws and tax codes. When you own the entity, that entire burden falls on your internal team. You have to be the expert on every local rule yourself.
- Risk and Liability Management: An EOR shares the legal risk with you since they are the employer on record. If you run your own entity, your business carries 100% of the risk for payroll errors, tax penalties, or employment disputes.
- Infrastructure and Presence: An EOR lets you piggyback on their existing bank accounts and tax IDs. A legal entity gives you your own brand-named presence and local banking, but it requires you to manage that infrastructure entirely on your own.
EOR vs. Setting Up an Entity: Which Option Is Better?
There is no single “right” answer, but there is usually a better choice for your current stage of growth. You have to weigh your budget against your long-term goals.
An EOR is better if:
- You need to hire someone in a new state or country immediately.
- You are testing a new market and aren’t sure if it will stay profitable.
- You only have a small handful of employees in that specific location.
- You don’t want to deal with the stress of local taxes and labor laws.
A legal entity is better if:
- You plan on hiring a large team of 20 or more people in that region.
- You need a physical office or a local bank account for your operations.
- You are committed to that specific market for the next five to ten years.
- You want absolute, direct control over every single HR and tax policy.
Conclusion
Deciding between an EOR or setting up a legal entity really comes down to how fast you want to move and how much risk you want to manage. If you need speed and simplicity, an EOR is the winner. If you need a permanent, large-scale presence, an entity is the way to go. Most companies start with an EOR and only move to an entity once they’ve proven the market works. If you are looking to expand into the US or Canada and want a partner to handle the complex payroll and compliance side, HR Options provides the expertise you need to scale without the stress.
Frequently Asked Questions
What is the difference between an EOR and a legal entity?
An EOR is a service that employs people for you using their own legal structure. A legal entity is a business you register yourself, meaning you are the one responsible for all legal and tax filings.
What does it mean to set up a legal entity?
It means you are officially registering your business with the local government. This involves getting a tax ID, opening a local bank account, and following all local corporate laws.
What qualifies as a legal entity?
Common examples include corporations, Limited Liability Companies (LLCs), and subsidiaries. Any structure that the government recognizes as a separate “person” for tax purposes counts.
