Employer of Record vs Setting Up a Legal Entity: Which is Better for Your Business?
By Ailysh Velarde | 01/10/2025
In a post-pandemic setting, businesses have increasingly turned to Employer of Record (EOR) companies or legal entity setups in the Philippines to expand globally or fill critical roles. This strategic move is particularly timely given the U.S. labor market's current shortage of workers. According to the U.S. Chamber of Commerce's analysis of Bureau of Labor Statistics data, in September 2024, the U.S. job market is characterized by a significant labor shortage, with a limited pool of workers available to fill numerous job openings.
The path to establishing a stable presence in the global market can vary significantly depending on your chosen approach. Two common methods are utilizing Employer of Record (EOR) services or setting up a legal entity in the selected country. This blog post will explore how each option operates in the Philippines, helping you make an informed decision based on your company’s goals, budget, and resources.
What Does an Employer of Record (EOR) Do for Your Company?
An Employer of Record or most known as EOR is a third-party service that acts as the official employer on behalf of an organization, handling essential tasks such as hiring, payroll, taxes, benefits, and compliance with local labor laws. This means that while your EOR is the legal employer of your international team, you retain full control over daily operations and employee performance.
An EOR simplifies hiring and managing a global workforce, allowing you to scale operations without establishing a formal business entity in the new market.
What Does a Legal Entity Do for Your Business?
A legal entity provides a formal structure that separates the business's legal responsibilities and assets from those of its owners, offering essential benefits to protect and organize the company. By establishing a legal entity, such as a corporation, LLC, or partnership, a business can enter contracts, own property, and hire employees under its name rather than its owners. This structure is crucial for managing liability because it typically limits the personal financial risk of the business owners, as their assets are generally protected from debts and liabilities incurred by the business.
What are the Areas of Consideration in Using an Employer of Record (EOR) vs a Legal Entity in the Philippines?
| Feature | Employer of Record (EOR) | Legal Entity |
| Cost-Effectiveness | Cost-effective alternative with a pre-agreed monthly or retainer fee, minimizing initial investment and financial risk for testing new markets. | High initial costs due to legal, administrative, and compliance expenses; eliminates third-party fees but requires significant upfront capital. |
| Hiring and Operations Speed | Faster hiring and onboarding process managed by the EOR, ensuring all paperwork is compliant, leading to immediate productivity gains. | Slow due to long setup times for entity creation, legal registrations, and recruitment, which can delay market entry. |
| Tax and Compliance Management | EOR handles local tax filings, social security contributions, and labor law compliance, reducing legal disputes and administrative strain. | Requires internal management of all tax filings, regulatory compliance, and contributions, demanding dedicated resources and local expertise. |
| Scalability and Flexibility | Easily scale workforce up or down based on project needs without long-term commitments, ideal for flexible market testing. | Less flexible; adjustments in workforce require internal planning, making scaling up or down more costly and complex. |
| Risk and Liability | EOR assumes full liability for employment-related issues (disputes, claims), shielding the client from potential financial and reputational risks. | Business holds full liability for employment-related risks and must manage any legal claims, which can impact reputation and finances. |
| Local Compliance | EOR manages local compliance, staying updated with regulatory changes and minimizing compliance risks. | Business must actively monitor local regulation changes, requiring consistent legal support to maintain compliance. |
| Market Presence and Credibility | Suitable for quick entry but limited local visibility as EOR is the legal employer. | Enhances visibility and credibility in the local market, fostering trust with customers, partners, and employees. |
| Suitable for Business Scale | Ideal for companies with smaller or temporary workforces or those testing new markets; not recommended for operations with 200+ employees due to long-term cost concerns. | Suited for large-scale, established operations with substantial local workforces and long-term market presence, potentially offering cost benefits over time. |
| Operational Control | The company retains control over daily operations, while EOR manages employment obligations. | Full control over all operational and employment aspects, enabling comprehensive management but with increased responsibility. |
| Long-Term Viability | Some countries may impose time limits on EOR arrangements; not ideal for indefinite use, especially in markets with restrictive EOR regulations. | No time limitations; business can operate indefinitely under its legal entity structure, suitable for sustained growth and presence. |
| Setup Complexity and Duration | Minimal setup time, allowing rapid market entry without extensive bureaucratic requirements. | Time-intensive process, often taking six months to a year, involving steps like securing permits, registering with local agencies, and adhering to bureaucratic processes. |
| Administrative Burden | Reduced administrative burden, as the EOR handles most employment-related tasks such as payroll and benefits. | Increased administrative complexity, including tasks like opening bank accounts, hiring local legal counsel, and navigating local employment standards. |
| Transitioning Potential | Suitable for initial entry but may need transitioning to a legal entity as the company’s workforce and revenue in the market grow. | Ideal for established companies with long-term plans; offers greater operational control and cost-efficiency for sustained growth. |
What are the Requirements for Setting Up a Legal Entity in the Philippines?
Establishing a legal entity in the Philippines involves several steps, especially for foreign-owned companies. Key steps include:
1. Registering a Company Name: File and register your chosen company name with the Department of Trade and Industry (DTI).
2. Obtaining Local Business Permits: Secure business permits from the local government unit where your operations will take place, including Barangay clearance.
3. Registering with Government Agencies: Register with the Bureau of Internal Revenue (BIR) and other mandatory organizations such as the Social Security System (SSS), PhilHealth, and HDMF (Pag-IBIG Fund).
4. Compliance with Employment Regulations: Ensure that your business meets local employment standards and is registered with the Department of Labor and Employment (DOLE) if hiring employees in the Philippines.
When to Switch from an Employer of Record (EOR) to Your Own Legal Entity?
As your business grows and becomes more established in the Philippines, there may come a time when transitioning from an EOR to your own legal entity makes financial and operational sense. Generally, companies should consider this shift when they have a substantial local workforce, established revenue streams, and long-term plans for market presence. At this stage, establishing a legal entity can reduce monthly service fees, offer greater operational control, and better support sustained growth in the local market.
Conclusion
An Employer of Record (EOR) service, as provided by KMC Teams, manages a streamlined, cost-effective path for businesses to expand internationally, handling payroll, compliance, and local hiring without the need for a legal entity. While setting up a local entity offers full operational control, it’s a time-intensive process best suited for businesses with significant market presence. For companies seeking manageable, efficient expansion, an EOR is a strategic solution that reduces compliance risks and accelerates global growth. Partnering with KMC Solutions allows businesses to scale confidently, ensuring that their workforce remains compliant, well-supported, and ready to contribute to new market success.
Weighing the advantages of Employer of Record?