While expanding, businesses get confused in the war between EOR vs. Opening an Entity. There has always been confusion about both models while selecting one of them. A model for global expansion should be chosen based on company requirements and cost. Widening the boundaries will help the business make your base stronger. Businesses worldwide seek the most effective ways to expand and enter new markets. While exploring the ways, they often learn about two of the most mature models: Employer of Record and opening an entity.
Both are undoubtedly better options to make your business global. However, they bring different requirements and serve various purposes. The EOR model existed due to increased demand for companies to establish a footprint in a new country. With EOR companies don’t have to deal with labor laws, tax systems, and legal entity management.
When it comes to the expansion through a legal entity model it requires setting up a subsidiary or branch in a foreign country. This model requires a more complex and expensive setup, and the company has overall control.
If you’re planning to expand in India, these two options provide the best benefits and challenges mainly in terms of cost. Cost is considered an important factor, especially for startups with limited resources.
In this blog, we will compare the costs of the employer of record and the cost of opening a legal entity. This will give you a clear picture of which model might be more cost-effective during expansion.
Cost of Employer of Record
EOR is a relatively less expensive model with an initial setup cost which is one of the biggest advantages. The hiring cost of remote employees in India with an EOR partner is USD 13,346.34. This is the sum after combining the service charge and the average typical salaries of the 6-member team. If you plan to establish a footprint outside your country, taking assistance from a global EOR partner would be advantageous.
A multi-country, EOR does not concentrate on one nation; it provides services across various countries. A multi-country EOR typically has greater service fees than a local EOR. Global EORs normally bill a monthly flat fee of USD 600–800 per person.
It can be costly to work with a worldwide EOR service provider for several teams located in several nations. Rather, using a local EOR independently for every nation significantly lowers expenses.
Cost of Legal Entity
In India, to set up a subsidiary you will need to pay the government fees. You need to complete name reservation, incorporation filing, DIN application, PAN/TAN filing, etc. The cost for those activities generally should be INR 7,000-20,000.
This also includes professional fees, paid to the respective lawyer and an accountant. You have to hire a lawyer and an accountant to handle your documentation, compliance, and filing processes. Their fees averagely fall between INR 10,000 and 50,000. It is also dependent on the number and complexities of the incorporation process.
The notarization fee and the stamp duty on the articles of association plus the memorandum are examples of additional miscellaneous head expenses. It involves, the cost of obtaining a single registered office address. The prices under the miscellaneous titles are between INR 5,000 and INR 10,000.
The final cost for setting up an organization in India would come up to 15,000 to 50,000 rupees at most. Once again, it is dependent upon the needs of the business.
Check out these 5 Things to Know Before Forming a Subsidiary Company in India.
Comparison Between the cost of EOR and an entity in India
We have understood the cost of EOR and Entity individually. It becomes crucial to understand the cost comparison between EOR and forming a legal entity while deciding on global expansion. Both the models have better solutions but there is a great difference in terms of costs and operational structure. let’s compare both models for expanding in India.
| Cost Element | EOR | Entity Setup |
| Initial Cost Lower: | Onboarding fees, legal compliance checks | Incorporation, legal, consulting fees, office setup |
| Running Cost | Consolidated monthly fees, payroll management, employee benefits | Payroll, HR, compliance, infrastructure, accounting, tax filings |
| Closing Cost | Minimal: Exit fees, final tax clearances | High: Legal dissolution, employee terminations, asset liquidation |
| Cost of your time | No involvement in compliance and operations so the time involved is only in work execution and allocation. | Apart from work execution, management has to get involved in compliance, operations, and logistics. |
Initial Cost:
Compared to opening an entity, EOR has a lower initial cost. This includes incorporation fees, office setup, and legal procedures.
Running Cost:
EOR provides a simple payment structure with a fixed monthly fee. Being cost-effective, EOR is the best option for small to medium operations. With a legal entity, it’s almost the opposite of EOR. It offers a broader range of recurring expenses, including payroll, compliance, HR, and infrastructure maintenance.
Closing Cost:
Regarding flexibility, EOR is the best option with minimal closing costs and a parallel simplified exit process. It’s a big struggle and an expensive process when shutting down an entity.
Cost of your time:
Time is a key distinction between EOR and opening an entity. Costs associated with time can greatly impact your total investment and time to market.
- EOR: Employee onboarding through an EOR can be completed quickly, taking one or two weeks on average, enabling a swift launch into new markets. The EOR handles the legal and administrative responsibilities, greatly lessening the time commitment on the parent company.
- Opening an Entity: Establishing an Entity depends on the industry and the intricacy of the company, it will take three to twelve months. The time and resources required for the entire process are increased by the continuous legal consultations, compliance procedures, and delays during this time.
The comparison is more about scalability and long-term financial impact. At the same time both the terms are compared by control and flexibility. With EOR the business gets a simplified cost structure and with opening an entity the business enters the market.
The flexibility of EOR is attractive for businesses that are planning to hire a small team without any administrative burden. Businesses that want full control over the operations automatically get pushed towards forming a subsidiary.
Conclusion
While choosing between the models EOR and opening an entity for expansion in India, cost, control, and flexibility are the main concerns. The EOR model is the most cost-effective and ideal option for small and medium-scale businesses. It can efficiently manage the team, and streamline the hiring process without having to establish an entity in the respective country. This is the best option for companies exploring new markets.
On the other side, for larger organizations seeking full control over their operations, establishing an entity would be a better and long-term solution. Despite having higher initial, running, and closing costs, it turns out to be a better way of expansion in India. It becomes a complex decision when permanence and higher financial commitments are indulged.
The blog concludes that both options are the best and the right choice depends on the aims and objectives of your organization. For many EOR is a preferable model due to its flexible and low-risk characteristics. While the companies who prefer overall control and scalability for the long term would prefer entity; however, for most of the organizations, entity is not the best suited option, as it adds on a lot more compliance and monitory burden. Thus, it is quite ideal to opt for an EOR solution if you do not plan to sell in that country.
