When you're looking to expand your tech business into the global market, you have a number of options available. Do you set up a local entity? Partner with a PEO? Engage with an EOR? How do you even know which path is the right one for you?
As the Company Director of Emerald Technology, a renowned global expansion consultancy, I have been privileged to guide numerous businesses through the intricacies of international growth. Over the past 12 months alone, I have successfully established entities in more than 15 countries, including the Netherlands, Ireland, India, Australia, Portugal, South Korea and South Africa, just to name a few. This extensive experience enables me to compare the costs and benefits of these two approaches comprehensively.
So, together, let's embark on this journey and discover the best strategy for you tech businesses' worldwide scaling.
Setting up a local entity
Establishing a local entity is a complex process that involves a legal presence in a foreign country, such as a subsidiary or branch office. You see this all the time with various big names in tech - from Amazon to Oracle. It requires careful consideration, understanding of regional laws, compliance, regulations and, of course, a substantial amount of money.
Let's explore the steps involved in launching a local entity in more detail:
1. Engaging a Reputable Local Provider
Navigating the intricacies of regional regulations and requirements is best done with the support of a reputable local provider. These professionals have in-depth knowledge of company registration processes and adherence obligations and can guide you through the legal intricacies of the specific jurisdiction.
The process of setting up your business in a new jurisdiction extends beyond initial registration. It involves carefully considering how your company is structured, for instance, your selection of the business category. An incorrect setup or misclassification could lead to serious tax and compliance issues down the road. You might inadvertently place your business in a higher tax bracket or expose it to potential penalties for non-compliance.
With the help of a reputable local provider, you can mitigate these risks, ensuring that your business is correctly set up from the start, compliant with local regulations, and optimised for future operations.
2. Fees Paid to the Local Government
When establishing a local entity, you will encounter various fees that must be paid to the domestic government. These fees can include registration, licensing, and taxes, depending on the specific jurisdiction. Understanding the financial obligations of establishing a local entity is essential to guarantee compliance and avoid any unexpected costs.
3. Notary Costs
In most instances, when you are not a resident of the country where you are establishing the entity, notary costs come into play. These costs ensure that the necessary legal documents, such as contracts or agreements, are correctly executed and authenticated. Notary services play a crucial role in validating the authenticity and legality of these documents.
4. Bank Account Setup
Opening a local bank account is an essential steps in the process of creating a local entity. An in-country bank account enables smooth financial transactions, including receiving payments from clients or customers, paying local expenses, and facilitating payroll processes. Choosing a reputable bank that offers the necessary services and aligns with your business requirements is essential.
5. Employment Contract and HR Setup
Complying with domestic employment laws and regulations is vital when establishing a local entity. This includes creating employment contracts that adhere to regional labour laws, establishing HR policies and procedures that align with the new jurisdiction, and ensuring adherence to local employee benefits and entitlements. Engaging legal and HR professionals well-versed in the specific employment laws of the country where you establish your entity is crucial.
You can successfully set up a local entity by carefully following these steps and ensuring conformity with domestic laws and regulations. However, it is essential to consider the associated costs, logistical challenges, and ongoing responsibilities involved.
What is an Employer of record?
Let's explore an alternative approach: partnering with an Employer of Record (EOR) to streamline your international expansion process and optimise your operations.
An EOR is a specialised service provider that assumes the role of the legal employer for your employees in a foreign country. Teaming up with an EOR offers a comprehensive solution for expanding your business globally.
Consider this analogy: Amazon Web Services (AWS) is a leading provider of cloud infrastructure. They've heavily invested in the technology required for hosting services, then recoup their investment by charging users a monthly fee. An EOR operates on a similar principle. The EOR provider invests in the infrastructure needed for businesses to expand into new countries, including setting up a local presence, creating legally compliant employment contracts, and providing HR, back-office, and compliance support to handle potential challenges.
With Emerald, this translates into seamless integration with your existing HR, Finance, and Operations teams. The best part? There are no upfront costs, instead, we only charge a monthly fee for our comprehensive services, postponing us as a cost-effective extension of your team.
Let's explore the general steps involves in getting started with an EOR.
Step 1: Consultation and Needs Assessment
The first step in joining forces with an EOR is to engage in consultation and needs assessment. You will discuss your expansion goals, specific requirements, and countries you wish to target for your business. The EOR will provide expert guidance and solutions tailored to your business needs. They will analyse the local market conditions, labour laws, and regulatory environment.
Remember to take your time on this step. Picking the right EOR partner is absolutely crucial for a smoother sailing expansion experience.
Step 2: Onboarding and Employee Engagement
Once you select an EOR, they will handle all the onboarding processes for your employees in the target country. This encompasses managing employment contracts, ensuring compliance with regional labour laws, and setting up payroll systems.
Your EOR partner will navigate the complexities of local employment regulations and make sure that all necessary documentation in place, allowing you to focus on other critical aspects of your business expansion.
Step 3: Payroll and Benefits Administration
An EOR takes full responsibility for payroll and benefits administration on your behalf. They handle the entire payroll process, from calculating wages to processing payments accurately and on time. This includes managing tax withholding and ensuring adherence to local tax regulations.
The EOR will also administer mandatory employee benefits, such as health insurance and retirement plans, in accordance with domestic laws and regulations. By entrusting these tasks to an experienced EOR, you can streamline your payroll operations and promptly ensure your employees receive their salaries and benefits.
Step 4: Ongoing Compliance Support
Compliance with domestic employment laws, regulations, and tax requirements is crucial for cross-border scaling. An EOR provides ongoing abidance support, monitoring changes in labour laws and regulations and ensuring your business remains compliant as you need to expand into new countries. They stay current with the legal landscape, handle all filings and reporting, and guide adherence matters.
Difference between setting up and entity and partnering with an EOR
When deciding between creating a local entity or collaborating with an EOR, it is vital to consider the following differences:
Costs and Logistical Hurdles
Regarding costs and logistical hurdles, there are distinct factors to consider for launching an in-country entity and teaming up with an EOR.
Setting Up a Local Entity
Forming a local entity involves various costs and logistical hurdles, including:
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Engaging an in-country provider for the setup process
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Fees paid to the domestic government
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Notary costs (especially if you are not a resident)
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Bank account setup
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Employment contract and HR requirements
Partnering with an EOR
In contrast, joining forces with an EOR offers a more streamlined and cost-effective approach. They key considerations include:
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Consultation and needs assessment
- Onboarding and employee engagement
- Payroll and benefits administration
- Ongoing compliance support
Comparatively, working with an EOR reduces the upfront and ongoing costs significantly. Over a 3-year period, hiring an individual using EOR services costs approximately £20,000.
Benefits of working with an EOR instead of setting up an entity
Working together with an Employer of Record (EOR) offers numerous benefits compared to establishing a local entity.
Let's explore these advantages in more detail:
Speed
Setting up an entity from scratch could take a minimum of four weeks and up to a whopping 24 weeks - depending on the country you wish to expand your business to. This includes but is not limited to, registering your company with local authorities, setting up a physical location, setting up financials such as bank accounts, and hiring local staff.
However, when you partner with an EOR, this 24-week timeline is condensed into just 24 hours. Your company can be up and running in a new market in no time while your EOR partner sorts out the nitty gritty details - giving you the time and energy to continue focusing on your core business.
Cost-savings
One of the primary advantages of working with an EOR is its significant cost savings. When setting up an entity, businesses face various expenses such as registration fees, licensing fees, notary costs, ongoing accounting and payroll services, and more.
A Deep Dive Into Cost Savings
Understanding the financial dynamics between Capital Expenditure (CapEx) - large investments in assets such as buildings - and Operating Expenditure (OpEx) - routine costs like salaries and rent - reveals the advantages of an EOR.
An EOR offers a clever strategy to minimise these outlays by managing elements such as recruitment, payroll, and employee benefits. An EOR eliminates the need for setting up new entities and associated costs, like hiring HR staff and paying accountants. Moreover, employees under an EOR don't add to the company's headcount, resulting in a leaner financial profile.
Therefore, an EOR stands as a compelling option for businesses aiming to cut expenditures and enhance operational efficiency.
Streamlined Expansion
Partnering with an EOR offers a streamlined scaling process. EORs have ready-to-use entities and infrastructure in place, eliminate the need to navigate complex legal and administrative procedures. By leveraging the EOR's knowledge of local markets and established relationships, businesses can expand into new countries quickly and gain a competitive edge.
Plus, the EOR's comprehensive services would generally encompass onboarding, payroll administration, benefits management, and ongoing compliance support. This partnership empowers your business to navigate international growth challenges effectively and ensures a seamless transition into new markets. Your EOR partner can handle the nitty-gritty bits of business expansion while you keep your focus on your core business.
Compliance Assurance
Compliance with local labour laws and regulations is critical to global expansion. EORs specialise in navigating the intricacies of each jurisdiction, ensuring your business remains compliant with employment laws, tax regulations, and other legal requirements. This mitigates legal risks and provides peace of mind, allowing you to focus on core business activities without worrying about complex compliance matters.
Scalability and Operational Efficiency
Collaborating with an EOR provides businesses with the scalability and operational efficiency needed to support their international workforce. EORs handle vital functions such as payroll management, tax withholding, benefits administration, and compliance.
Outsourcing these responsibilities to an experienced EOR business can streamline operations, reduce administrative burdens, and ensure accurate payroll processing. This scalability and operational efficiency enable enterprises to focus on strategic initiatives and core competencies, during overall productivity and growth.
Why Choose Emerald
In the realm of global workforce solutions, Emerald stands as a premier EOR. Our ability to respond rapidly and efficiently to the needs of businesses and their international workforce sets us apart. Thanks to our pre-established infrastructure, we can issue a contract and onboard an employee within a swift 24-hour window. This is a unique benefit in the EOR industry, particularly valuable for businesses requiring immediate solutions to address their global workforce needs.
Considering this and other advantages such as scalability, compliance assurance, streamlined expansion and cost savings associated with partnering with an EOR, it is clear that this option offers a compelling alternative to setting up a local entity. By leveraging the expertise of an EOR like Emerald, your tech business can navigate the complexities of worldwide expansion more efficiently, saving both time and money.
If that seems like a good deal to you, let us utilise our years of experience to help your company grow. Contact us today to learn more about how our EOR service can streamline your global growth process.