EOR or subsidiary? Choose from the operating facts
An employer of record and a local subsidiary solve different problems. Use an EOR when another qualified entity should employ the team. Build an entity when the business needs its own legal and operating presence. The right answer depends on the market, the work, and who must control each obligation.
What changes between the two models
| Question | EOR | Your local entity |
|---|---|---|
| Who employs the worker? | The EOR is the legal employer; your team directs the work within the agreed arrangement. | Your local company is the legal employer and directs the work. |
| Who runs payroll and filings? | The EOR operates local payroll and employer filings, with inputs and funding from you. | Your company owns the obligations and may run them internally or appoint vendors. |
| What do you pay for? | Employment cost plus the provider's disclosed fees and pass-through items. | Employment cost plus incorporation, accounting, payroll, banking, governance and closure obligations. |
| What control do you gain? | Operational direction of the employee, subject to the employment agreement and EOR process. | Direct control of employment, local contracts, banking and entity governance. |
| How do you exit? | End or transfer employment under local law, then close the provider relationship. | Resolve employees, taxes, contracts and statutory records before an entity can be wound down. |
Neither model removes the need for legal and tax review. An EOR takes on defined employer duties; it does not make permanent-establishment, immigration, worker-direction or regulated-activity questions disappear.
Start with five decision gates
1. What must the business do locally?
If the business needs a local licence, customer contracting entity, bank account, lease, import registration or regulated presence, an EOR may cover employment but not the wider operating requirement.
2. Is the work suitable for EOR?
Check the role, seniority, authority to sign, sales activity, intellectual property, immigration status and industry restrictions. Ask counsel to review tax presence where the employee can bind or represent the company.
3. Is the hiring plan stable?
Use a dated hiring plan by country, role and start month. A confirmed long-term operation supports an entity case; an uncertain market test can support an EOR case.
4. What is the full cost?
Compare the same period and assumptions. Include provider charges and pass-throughs on one side; include setup, payroll, tax, accounting, directors, banking and eventual closure on the other.
5. Who owns the process?
Name owners for payroll inputs, approvals, employee questions, filings, funding and offboarding. An entity without an operating team is not a complete employment model.
Build a comparable cost model
Keep salary and statutory employer cost constant in both scenarios. Then add only the costs that differ. For EOR, request the administration fee, deposits, minimums, FX policy, benefits charges, onboarding or offboarding fees and third-party pass-throughs. For an entity, include formation, professional advice, registered office, directors, accounting, payroll, banking, insurance, annual filings, internal staff time and closure.
A single universal break-even headcount is misleading. Country rules, compensation, provider pricing, entity type and internal staffing change the result. Model your actual countries and update the model when those inputs change.
When to move from EOR to your own entity
Review the model when the country becomes a durable operating market, local contracting or licensing becomes necessary, provider restrictions interfere with the work, or your own entity gives the required control. Headcount can influence cost, but it should not be the only trigger.
- Confirm the entity case: document business purpose, legal form, tax review, banking, licences and operating owner.
- Map every employee: preserve compensation, benefits, service history and accrued balances where local law or the agreed transfer requires it.
- Sequence registrations: the entity, payroll, tax, social insurance and benefits must be ready before the employing party changes.
- Plan consent and communication: determine whether termination and rehire, transfer rules or employee consent apply; explain dates and payslip changes clearly.
- Reconcile the cutover: check final EOR payroll, first entity payroll, leave balances, deductions, filings and invoices.
Do not promise a transfer date until local advisers and both payroll operators have confirmed the sequence. The exact mechanism varies by jurisdiction and facts.
Questions to put into the approval memo
- Which local activities will the team perform, and who can bind the company?
- Which duties sit with the provider, the client and the employee?
- What assumptions drive the cost model, and who will update them?
- What event triggers a model review?
- How would employees move or exit, and what records must be retained?
The final memo should show the decision, the rejected alternative, the assumptions, the owner and the next review date. That makes the choice auditable when plans change.