EOR vs. Subsidiary: Which Path is Right for You?

Expanding into the global market opens up a diverse world of opportunity and profit. . No matter where you decide to expand internationally, one thing is for sure: A successful approach to international expansion requires understanding the country’s local labor laws. 

What is an EOR?

An employer of record provider, or an EOR, helps businesses onboard workers quickly and without establishing an entity or building a local HR team abroad.

An EOR is responsible for local HR processes, such as: 

• Maintaining compliance with local employment laws and other regulations

• Drafting employment contracts in the correct language

• Managing payroll and taxes, including withholdings and deductions payments as well as things like 13th- and 14th-month payments 

• Administering local benefits, such as private health insurance and mental health resources

• Registering with local social security institutions, foreign tax authorities, and other government institutions 

• Navigating sticky situations, including terminations and severance (layoffs in the US are much different than layoffs in foreign countries)

As the legal employer for your international workers, the EOR helps with  maintaining compliance, saving businesses time, money, and resources. Partnering with an EOR means no upfront capital costs.

Why do businesses partner with an EOR provider for global expansion? 

An employer of record is a seamless, growth-driven solution. It’s a low-cost and low-risk approach to expanding across borders.

Partnering with an EOR can help businesses standardize and reduce employer costs abroad, correctly classify workers, and avoid needing to pay for unnecessary expenses, such as office space, local accountants, legal experts, and additional HR staff. 

Each company recruits and builds their own team. The parent company maintains all of the intellectual property and manages their workers' day-to-day duties without worrying about paperwork abroad. 

Small businesses that work with an EOR are better equipped to:

• Retain key talent

• Explore new markets

• More focus on running business, delivering products, and offering services

• Less stressful relocation  

• Hire employees quickly

• Tap into international talent pools

• Pay workers across borders seamlessly, without hidden fees

When should businesses partner with an EOR?

In general, businesses partner with an EOR provider when they need to hire full-time employees in countries where they don’t have an entity. An EOR provider can help businesses scale up their operations after major company events, such as a venture capital raise, mergers, or acquisitions. 

You might benefit from partnering with an EOR if…

• Your recruiters or hiring managers have found top talent but navigating relocation and visa applications would be too costly

• You want to establish a hub abroad, tap into local talent pools in under-the-radar markets, and build a recruiting brand abroad

• You want to hire one or two workers in an new country for the first time

• You want to stand up a team of developers, engineers, or marketers in, say, Canada or the UK

• You want to avoid draining resources on building out an HR function abroad

• You are thinking about hiring in multiple countries at once

• You don’t have the resources to find local legal or accounting experts

What is foreign subsidiary company?

Unlike a branch office or a representative office, a foreign subsidiary company is a completely separate legal entity for tax purposes. A foreign subsidiary is owned or controlled by an overseas company, known as the parent company or holding company. 

Opening a foreign subsidiary reduces the risk of compliance issues for the e parent company, even though the parent company holds 50-100% of the subsidiary’s stock. If the parent company owns 100% of the foreign subsidiary, it’s referred to as a wholly owned subsidiary. With a wholly owned subsidiary, the parent company can appoint directors to the governing board and sell the subsidiary without shareholder approval. 

Challenges of setting up a subsidiary 

Setting up a subsidiary can cost hundreds of thousands dollars and usually takes over 6 months to complete. To set up a subsidiary, you will need to:

• Set up a local bank account

• Register with local and federal government institution

• Establish a local business address

• Stay up to date with compliance risks 

• Appoint a board of directors 

• Meet minimum capital requirements

• Attend in-person meetings to manage logistics abroad, such as visiting an embassy 

• Create localized benefits and compensation packages, as well as draft compliant employment contracts 

• Monitor minor changes in local, state, and federal statutory laws

Dissolving an entity can be quite difficult, so it’s best to evaluate all of the risks first. If you end up closing the entity, you will need to pay tear down costs, which can be unpredictable. 

When should you establish a subsidiary/entity?

For some businesses, establishing an entity abroad makes sense if…

• You’re focused on selling products and offering services in a new market

• You have a successful track record in similar markets (e.g., you have a foothold in Mexico and want to expand elsewhere in Latin America)

• You’re hyper focused on establishing brand awareness for your global presence 

• You have local, on-the-ground experts to navigate legal and tax issues, including business tax, income tax, profit tax, and value-added tax (VAT)

• Access to capital is not an issue 

• Foreign tax incentives make sense for your business model

• Diversifying your company’s financial portfolio is a priority  

EOR vs. Subsidiary: Questions to ask yourself

What are my global expansion goals? Business expansion plans look different for every company. Starting with an EOR makes the most sense, as you have a low-risk, cost-effective way to access a greater talent pool and enter a new market without an entity.

How much do I have budgeted for legal experts? Legal fees add up quickly, especially if you’re not well-versed in local laws. An EOR already has legal experts on board, which helps with maximizing your budget.

Do I have the time? Small businesses looking to open an entity or subsidiary without an EOR need to open bank accounts abroad, comply with laws and regulations across borders, find vendors for payroll & benefits, and establish an on-the-ground HR team. You will need to be willing to invest a significant amount of months, if not years, into your business.

How much upfront capital do we have? Establishing an entity can cost your organization thousands of dollars, which slows growth. Using an EOR enables you to hire international workers quickly, since they already have a physical and legal presence in the country.

Are you looking for solutions to test the waters internationally? If you’re only looking to hire talent, and don’t need a legal presence in the country to sell products or offer services, partnering with an employer-of-record solution may make more sense.

Are you looking for a solution with the potential to scale up without establishing an entity? Using an EOR can help you scale up your operations seamlessly. An EOR will have the local expertise to help you remain compliant with all employment laws. 

Choosing an EOR for your global expansion strategy

An EOR like Justworks can help you hire employees in a new market quickly, with the full menu of local features, including best-in-class benefits and seamless payroll. 

How Justworks Provides International EOR Services for Small Business

Through Justworks, you can now expand the boundaries of your talent search without setting up a local entity. Focus on building your team, and leave worrying about the nitty-gritty of HR and international compliance to us. 

Our team of local labor lawyers and experts ensure that your small business always remains compliant while expanding internationally. We handle the responsibility side of things so you can focus on what matters: managing your team. 

Learn more about how you can expand your international business through Justworks, and get started today.