EOR vs Entity: Decision Tree for Global Hiring and Protecting Your Cash Runway

EOR vs Entity Setup: A Decision Tree for Global Hiring

That perfect candidate, the one with the niche skillset your biotech firm needs, is in Germany. Or perhaps the enterprise sales leader who can unlock the US market for your UK SaaS startup is based in New York. The initial excitement of finding them is quickly replaced by a daunting operational question: how do you legally hire, pay, and manage them without derailing your budget or getting tangled in foreign compliance?

For a founder managing finances in QuickBooks or Xero, this is not just an HR problem. It’s a strategic decision with direct consequences for your cash runway. Choosing the wrong path can lead to unforeseen costs, significant delays, and legal risks you cannot afford. This guide provides a clear framework for how to choose between EOR and setting up a local entity, helping you make the right call for your stage and strategy.

Foundational Understanding: Your Two Paths for Global Hiring

When hiring an employee in another country, you have two primary legal paths. The simplest way to frame the choice is 'renting' versus 'buying' the infrastructure to employ someone. This distinction is critical for understanding the impact on your operational expenditure (OpEx) versus your capital expenditure (CapEx).

Path 1: The Quick Route - Employer of Record (EOR)

An Employer of Record (EOR) is a third-party organization that acts as the legal employer for your international team members on your behalf. They handle all local payroll, taxes, statutory benefits, and employment compliance, allowing you to onboard talent without establishing a legal presence in that country. This is the 'renting' model. You pay a monthly fee, treating the cost as a predictable operational expense. It is a flexible, low-commitment solution for cross-border employment.

Path 2: The Committed Route - Local Entity Setup

A local entity setup, or subsidiary, involves formally incorporating your business in the foreign country. In this model, you are 'buying' infrastructure. This means you create a distinct legal company, register with tax authorities, open local bank accounts, and manage all employment obligations directly. This route requires significant upfront capital and creates ongoing administrative overhead. It signals a long-term strategic commitment to the market and is the foundation for building a substantial overseas workforce management presence.

The Decision Tree: How to Choose Between EOR and Setting Up a Local Entity

Making the right choice comes down to answering four practical questions about your hiring plan, financial runway, speed, and risk tolerance. How you answer them will point you clearly toward one of these international hiring options.

1. How many people are you hiring in this country? (The Headcount Trigger)

The most significant factor is scale. Hiring a single engineer is operationally and financially different from building a ten-person sales team in the same location. The pattern across early-stage businesses is consistent: EOR is the default for initial hires, while an entity becomes a consideration only at a specific tipping point.

Your analysis should focus on the projected headcount in a single country over the next 12 to 18 months. The threshold to begin considering an entity is typically 5 to 10 employees in the same country. Why? Because EOR costs are variable and scale linearly with each employee, while entity costs are high but relatively fixed. As your headcount grows, you eventually reach a financial crossover point.

According to analysis from firms like Velocity Global and Oyster HR, the breakeven point between EOR and Entity setup is often between 5 and 15 employees, depending on the country and EOR pricing. For a SaaS startup hiring its first UK support specialist, EOR is the clear choice. If that same startup plans to build a 12-person UK sales hub within a year, the math begins to favor setting up a foreign subsidiary.

2. What is the real all-in cost? (The Runway Impact)

For founders managing burn rate in spreadsheets, accurately forecasting the all-in cost is essential. The two paths have dramatically different financial profiles that directly impact your runway. An EOR model is pure OpEx, while an entity model involves both significant CapEx and ongoing OpEx.

Employer of Record (EOR) services typically cost a flat fee of $500 to $1,000 per employee per month, plus employer burden costs. 'Employer burden' refers to the mandatory social contributions an employer must pay, such as social security, pension, and health insurance. These costs exist regardless of the model, but with an EOR, they are calculated and remitted for you. For US payroll, this is detailed in IRS Publication 15.

An entity model has high initial costs. Local entity one-time setup costs range from $15,000 to $50,000 or more, including legal fees, registration, and consultations. After that, you have ongoing administrative costs from $8,000 to $20,000 per year for filings, local accounting, and director fees, even before you pay your first employee.

Consider this synthetic example: a deeptech startup needs to hire one Senior AI researcher in Germany. The first-year costs, excluding salary and employer burden, show a stark contrast.

• EOR Model (Year 1): The primary cost is the service fee. At $800 per month, the total annual cost is $9,600.
• Entity Model (Year 1): This path involves major upfront investment. You could face a high-end estimate of $40,000 for entity setup, plus another $15,000 in ongoing administrative costs, totaling $55,000.

For a single hire, the EOR saves over $45,000 in first-year cash burn. If you were to hire five researchers, the annual EOR cost would be $48,000. In that scenario, the $55,000 entity cost starts to look more competitive, illustrating the headcount breakeven point.

3. How fast do you need them to start? (The Speed-to-Market Factor)

In the startup world, opportunity is perishable. Minimizing time-to-hire for critical talent is a competitive advantage, and the two models operate on completely different timelines. This speed can be crucial when competing for top talent.

The EOR onboarding timeline is typically days to a few weeks. Because the EOR provider already has established legal entities, payroll systems, and benefits plans, they can generate a compliant employment contract and onboard your new hire almost immediately. We repeatedly see founders needing to secure a key hire who has a competing offer; the ability to issue a compliant contract in days via an EOR can be the deciding factor.

In stark contrast, the local entity setup timeline is typically three to nine months. This lengthy process involves multiple sequential steps: engaging local counsel, registering the business, incorporating, setting up a corporate bank account, registering for tax and social security, and establishing a payroll system. For a biotech startup needing a lab scientist to begin work on a grant-funded project with a strict deadline, a nine-month delay is a non-starter.

4. What are the key compliance risks? (The Permanent Establishment Question)

Beyond cost and speed lies the critical issue of remote employee compliance. Navigating another country's labor, tax, and data laws is complex, and missteps can lead to severe penalties. The primary risk to understand is Permanent Establishment (PE) Risk.

PE risk is the danger that your company’s activities in a foreign country create a taxable presence, making you liable for corporate taxes there, even without a local entity. Hiring employees, especially in revenue-generating roles like sales, can trigger this risk. PE risk is fundamentally a question of where taxable business activity occurs. The OECD Model Tax Convention Article 5 is the usual reference point.

Here’s the critical distinction: an EOR can act as a shield. For non-revenue generating roles (e.g., R&D, customer support, administration), an EOR insulates you from PE risk because the EOR, not your company, is the legal employer. However, once you hire revenue-generating staff, the risk increases regardless of the model used, as their activity may be seen as conducting core business on your behalf.

Conversely, a local entity is a permanent establishment by definition. You are intentionally creating a taxable presence and agreeing to comply with all local corporate tax obligations. This provides clarity but also carries a greater administrative burden. The complexity varies by location; setting up in the UK is relatively straightforward according to HMRC Internal Manual on PE, while Germany is significantly more complex and expensive.

Practical Takeaways: Your Decision Summary

Your global hiring strategy should evolve with your company. The choice between EOR and an entity is not permanent; it’s a decision based on your current scale, strategy, and runway. Here is a pragmatic framework based on your startup's stage.

Choose EOR if:

• You are hiring fewer than five people in a single country.
• You need them to start work in under two months.
• The roles are primarily non-revenue-generating (R&D, support, operations).
• You want to test a new market with minimal upfront investment and maintain maximum flexibility.

Consider a Local Entity if:

• You plan to hire 5-10 or more people in one country within the next 12 to 18 months.
• You have a clear, long-term strategic commitment to that specific market.
• The team will be revenue-generating, such as a full sales or marketing hub.
• Your startup can absorb the $15,000-$50,000+ upfront cost and the 3-9 month setup delay.

Strategy by Startup Stage

• Pre-seed to Seed: Use EOR exclusively. Your focus should be on product development and finding product-market fit. Conserve cash, maintain flexibility, and avoid administrative distractions. Your finance stack of QuickBooks or Xero is not built for multi-entity consolidation.
• Series A: Default to EOR for most international hiring options. However, if your growth strategy includes a major international expansion, start modeling the entity breakeven point. This is the stage for planning, not necessarily immediate execution.
• Series B and Beyond: This is the inflection point. You likely have the strategic clarity and capital to justify an entity in your primary international market. An entity becomes a core part of your operational infrastructure. Continue using EOR for one-off hires in other countries to retain agility.

Ultimately, this decision is about matching your operational structure to your strategic goals. Start lean and flexible with an EOR, and invest in a local entity only when the scale of your commitment makes it the clear financial and strategic winner.

Frequently Asked Questions

Q: What happens when my team outgrows an EOR?

A: When you reach the headcount and strategic tipping point, you can transition employees from an EOR to your new local entity. This process, often called a "flip," should be planned carefully with legal and HR experts to ensure a smooth transfer of employment contracts, benefits, and payroll continuity.

Q: Can an EOR handle stock options and other forms of equity?

A: This is complex and varies by EOR provider and country. While the EOR manages salary and statutory benefits, equity is typically granted directly from your parent company. The EOR may assist with payroll deductions for tax withholding on equity events, but the legal grant and administration remain your responsibility.

Q: Is an Employer of Record the same as a PEO?

A: No. A Professional Employer Organization (PEO) requires you to have your own local legal entity. The PEO co-employs your staff, bundling HR services for a group of companies. An EOR does not require you to have a local entity, as they become the sole legal employer of record for your team.

Q: Does using an EOR eliminate all permanent establishment risk?

A: An EOR significantly mitigates PE risk, especially for non-revenue-generating roles, by acting as the legal employer. However, it is not a complete shield. If your employee's activities, particularly in sales, create significant economic value and are directed by you, tax authorities could still argue that you have a de facto taxable presence.