Summary
Deciding between an EOR and a subsidiary? This guide breaks down when to use each: EOR offers quick market entry, low risk, and flexibility, while a subsidiary provides deeper local control, tax benefits, and lasting brand presence. Choose based on your scale, goals, and commitment.
Global expansion remains a core theme for businesses of all sizes, as it opens up various avenues and opportunities for business growth.
At some point, all businesses, regardless of industry or business domain, need to explore new market opportunities.
Also, expanding into global markets can provide a haven for small businesses facing intense competition from large companies.
However, navigating global expansion is usually associated with unfolding challenges and can be highly difficult, especially for small businesses.
Even large companies often face various challenges when expanding globally.
To effectively navigate market expansion internationally, you’ve got two primary options, which shine prominently in cross-border business expansion: employer of record (EOR) services and a subsidiary company.
Through this blog, you’ll learn the key advantages of both options and understand which option will be more suitable depending on your business needs and size.
Also, you’ll know the key beneficiaries of both business expansion options.
Before we dive into further details, let’s understand the meaning and difference between EOR services and subsidiary companies.
What is an Employer of Record (EOR)?
An employer of record is a legal entity that acts as the employer for employees working for a company with different legal compliance systems.
It means that an EOR takes care of the legal responsibilities of professionals who work for a company based in another country.
For the record, EORs are the legal employers of your overseas workforce and handle administrative support services for your employees, such as payroll, taxes, benefits, and compliance.
With EOR assistance, you can hire full-time employees and expedite your global expansion without investing in a new entity in the target country.
In short, EOR services provide comprehensive support systems that facilitate seamless business expansion in another country without the need to form a subsidiary company.
What is a Subsidiary Company?
A subsidiary company is an entity partially or wholly owned by a larger organization, also known as a parent or holding company.
To be eligible for a subsidiary, the parent company must own more than 50% of the subsidiary’s stock.
In another case, the parent company can own 100% of the foreign subsidiary company’s shares, which makes it a “fully owned subsidiary.”
In a foreign subsidiary, the subsidiary operates outside the home country of its parent company.
As a result, subsidiaries have separate legal entities, which face different laws and regulations from those of the parent company.
Thus, foreign subsidiaries operate independently, even though the parent company has the upper hand in selecting their board of directors.
By setting up a foreign subsidiary, you can establish a strong presence in the local market of the target country.
You can directly hire full-time employees and navigate global expansion under your direct control.
When is EOR a Better Choice Over a Subsidiary?
Quick Entry Into New Markets
Using EOR services is the ideal option for overseas businesses seeking a hassle-free and efficient path to enter new markets.
By leveraging their well-established infrastructure and networks, EORs enable a global company to establish its presence in a foreign country with minimal delays and costs.
By opting for an EOR partner, you can eliminate bureaucratic delays and red tape problems associated with setting up a subsidiary company.
For instance, it takes 2-3 months to complete the incorporation of a subsidiary in India.
But, with an EOR partner, you can easily open a branch office in a week if you’ve already decided on the particular city.
Additionally, you can kickstart your business operations within a day or two if you’ve identified the necessary resources.
Low Capital Investment
When businesses don’t want to make a huge capital investment to establish their market presence, EORs offer the best solution.
By partnering with an EOR, you can expand your international business at a low cost, thereby saving you from the substantial upfront investment required for establishing a subsidiary.
For example, setting up a subsidiary company in India includes substantial registration costs and other notable fees.
However, EORs charge straight and fixed costs, which are calculated on a per-employee basis.
In India, EOR service charges range from USD 149 to USD 499 per month per head.
Some EORs charge service fees ranging from 8 to 18% of the employee’s monthly salary.
In general, subsidiary incorporation can be four times more expensive than using EOR services.
Learn more about the cost of building remote teams.
Testing the Waters
Not every business succeeds in global expansion.
It’s crucial for every business, especially small businesses, to thoroughly evaluate their target market before making a long-term commitment.
When you want to test the waters before making long-term financial commitments, using EOR solutions is the ideal option.
With EOR assistance, you can continually assess market dynamics, the supply and demand matrix, and regulatory compliance status.
Easy Business Exit
Working with EOR services is the ideal option when you look for a business expansion model that allows an easy exit from your business.
Global businesses often shut down their existing operations for various reasons, including a lack of market suitability or misalignment of work with overseas resources.
You can easily exit the target market without financial burdens or regulatory complications when working with EORs.
Closure of any business (subsidiary) is a daunting and time-intensive process due to multiple binding regulations.
For example, it usually takes 1-2 years for final account settlements and acquiring a no-objection certificate in the case of a business exit in India.
Handing Over Administrative Burdens
When you want to outsource administrative services for your remote professionals, opting for EOR services is a better option.
In many cases, small businesses consider handing over the responsibilities of managing their employees’ daily human resources (HR) activities to a third-party expert.
By outsourcing HR functions, businesses gain more time and space to focus on their core business activities.
Handling compliance challenges remains a significant risk for businesses with operations beyond borders.
EORs are the experts who handle various administrative activities that comply with the existing legal and regulatory framework of a target country.
Expand Globally Without the Hassle of Setting Up a Subsidiary
Ready to enter new markets quickly, test opportunities with minimal risk, and stay compliant — all without heavy investments or long-term commitments?
When is a Subsidiary a Better Choice Over EOR?
Long-term Commitment
Setting up a legal entity in a foreign market is a better option when you decide on long-term commitments.
The commitment comes after you’ve already done your cost-benefit analysis and calculated the return on investment.
Businesses typically decide on their long-term commitment when they have a clear and comprehensive understanding of the target market.
To form a subsidiary company, you need to decide on your approach and strategies to ensure your long-term commitment is successful.
Overseas Credibility and Brand Awareness
Establishing a subsidiary is more suitable when you want to expand your business credibility and brand awareness in the local market.
A subsidiary signifies a lasting presence in the local market and enhances the awareness of your company’s brand.
Having a local branch of a company is not enough to gain the trust of local customers and business partners.
With a local presence through subsidiaries, you can promote your brand using local support and networks.
Additionally, you can directly access a talent pool, attract and hire the best talent, and retain them with ease.
Fostering a long-term connection with local partners and customers plays a vital role in global expansion.
Strategic Tax Planning and Tax Benefits
Opting for a subsidiary is an ideal solution when seeking strategic tax planning and tax benefits.
As subsidiaries are separate legal entities, they operate independently and enjoy flexibility in their tax planning and optimization.
They can frame the policy structure and implement it to align with local tax incentives, which potentially reduces the overall tax burden of their parent companies.
As a subsidiary, you can establish specific operational standards without external interference and can easily integrate them into local customization for various tax benefits.
Sales of Products or Services
Subsidiary incorporation in a foreign country is a better decision when you want to sell your products or services in the target local market.
To sell your products directly to customers, you need to have a legal entity in the country.
To reach new customers for your products, you need to establish a strong local market presence and build a robust network.
Who Will Benefit From Using EOR Services for Global Expansion?
Startups and Small Businesses
EOR services offer all-in-one solutions for startups and small businesses seeking global expansion at a minimal cost.
Using the services, small businesses can safely explore foreign markets without the financial burden and compliance risks.
Learn more about the employer of record benefits for small businesses.
Short-term Projects
EOR solutions are more suitable for businesses focusing on short-term projects or hiring professionals for short-term contracts.
In the EOR model, businesses can quickly hire overseas professionals and retract them with zero complications when the project concludes.
Outsourcing Administrative Functions
Using EOR services is an ideal solution for companies seeking dedicated HR and legal experts to help manage their overseas resources.
Businesses can simply outsource the administrative functions of their overseas workforce to an EOR partner without needing in-house expertise.
No Sales, Only Support Center
Opting for EOR services is an ideal option for businesses that don’t have sales activity when expanding their overseas workforce.
It’s the best solution for companies seeking a support center or unit in a specific country.
Not only are EORs cost-effective solutions, but they also offer expertise for the smooth functioning of support centers.
Which Businesses Are the Key Beneficiaries of a Subsidiary Company?
Established Enterprises
Establishing a subsidiary company is the ideal option for large businesses or established enterprises with strong financial conditions.
Acquiring a company in a foreign country makes more sense when businesses see their long-term growth and competitive advantage in investing in the target country.
Industry-specific Businesses
For businesses seeking expansion in a specific country that offers easy access and advantages for the particular industry, forming a subsidiary is more suitable than opting for EOR services.
Additionally, specific industries, particularly those in finance and pharmaceuticals, often face specific regulatory requirements; choosing subsidiary incorporation can be a more effective way to comply with these stringent regulations.
Global Expansion as a Core Strategy
Setting up a subsidiary company is the best option for businesses seeking global expansion as a core strategy for their growth opportunities.
Marking a global footprint and reaching new customers can be effectively prepared with subsidiary formation.
Conclusion
In conclusion, the choice between EOR services and subsidiary company formation will differ from one business to another.
Choosing the best option depends upon various factors, including the business size, financial conditions, business needs, and goals for international business expansion.
Typically, large companies prefer to opt for subsidiary incorporation, as it offers better control over their resources, long-term market opportunities, and competitive advantages in the industry.
However, setting up a foreign subsidiary can be challenging, even for large companies, if they lack a clear understanding of the unique work culture, employee expectations, and local customs.
For the effective operation of their subsidiary companies, large companies can utilize the benefits of EOR services.
With an EOR partner as an interim caretaker, large companies can fully prepare their subsidiary companies for smooth functioning.
For small businesses, opting for EOR solutions remains the best option, as they can explore a new market with reduced costs, minimal risks, and an easy process for market exit.
About Remunance
Remunance is an Employer of Record (EOR) services provider in India, helping global companies hire, manage, and support full-time employees without setting up a local entity. We take care of HR, payroll, compliance, and benefits so businesses can focus on growth while building their teams in India with confidence.
Remunance enables businesses from UK, Australia, Canada, France, US, and the Middle East to recruit, hire, and manage workforce and benefits in India.
