Partnering with a specialist Employer of Record (EOR) company is often an exciting and key step for businesses looking to expand into new global markets. Thanks to their ability to operate within target locations without having to set up a legal entity, EOR firms like Leap29 help businesses to speed up their time to market, streamline their HR processes, offer unique employee benefits and so much more.
However, whilst hiring an EOR firm has several advantages in the short-term, it’s important to understand that if your business continues to grow within your chosen location, then switching from an EOR to a legal entity may be on the horizon. Carry on reading to look for the signs that it might be time to switch.
Increased Number of Employees
When bringing an EOR company on board, it’s common for businesses to only have a select number of employees operating within the target location. This is true for various industries, no matter which sector you work in - whether it be technology, construction or education for example.
Though the duration for EOR arrangements will vary from country to country, it is crucial that your company is aware of the risks when growing your workforce internationally. Problems may begin to arise with local authorities however if you continue to grow your employee base for a sustained period of time, and are still using an EOR to facilitate your operations.
Additionally, the roles and activities of employees (and the economic value gained from those activities) will be considered by said authorities as they determine whether you should be operating as a permanent establishment (PE) instead. This is especially true if employee actions are revenue-generating and therefore the PE risk must be considered at all stages of business expansion. If you fail to operate within the correct category, whether it be purposefully or inadvertently, your company may be at risk of double taxation and other legal consequences.
Planning To Be Fully Operational
As mentioned, the activities of your employees hold a significant weight when it comes to deciding whether an EOR or legal entity is necessary for your business plans. EOR firms do not eradicate the risks associated with PE, and if you’re planning to become fully operational within your new jurisdiction then it may be time to set up a legal entity.
A Long-Term Strategy
Of course, each business will have its own set of objectives. Where some businesses may only plan on a temporary presence in their chosen market, companies looking for a more permanent presence will have to cater to the market requirements accordingly. Some businesses may even decide to set up a legal entity as soon as they decide to expand into new markets, which although may take more time initially, may prove more cost-effective in the long-run.
Having a legal entity established allows companies to be completely agile in their operations, enabling them to plan their business objectives more accurately. In addition to this, employees may feel more connected to the company culture once a legal entity has been created for the business, helping them to feel more secure in their role.
What To Consider When Moving From An EOR to a Legal Entity
There are many things to consider when thinking about transitioning from an EOR model to establishing a legal entity in a new country, such as:
Planning The Switch
It’s no secret that establishing a legal entity in a new country can be an extremely time-intensive process, even when dealt with compliantly. In some cases, successful incorporation can take companies a number of months, and therefore should be planned ahead of time to account for the number of hurdles ahead.
Managing Employee Benefits & HR Processes
If you’re considering moving away from the EOR model, then it is vital to think about which processes you will then be responsible for in-house again, rather than passing the responsibility to an outsourced EOR provider.
Employee benefits, alongside several HR processes like payroll, compliant employment contracts and navigating local tax laws are dealt with by employers of record, meaning you will have to consider how these processes will be continued smoothly and compliantly. Not only does this ensure you are meeting requirements set by your jurisdiction, but that you are meeting employee expectations also.
Get In Touch With The Expansion Experts
At Leap29, we have been helping companies expand internationally and compliantly for over two decades. If you’re currently thinking about making the switch from an EOR to a legal entity, get in touch with our expert team today and we can discuss your options.