Entity or EOR: Which makes the most sense for your business?
“Do we need to go through the process of setting up a foreign entity or work with an EOR…”
THAT is the big question many US companies face when they want to expand into Canada - or add talent that prefers to stay put.
Here, we’ll explore when it makes the most sense to create an entity, and where you can benefit from partnering with an employer of record.
Having the “entity” conversation
Whenever we talk to clients about their business’ needs, we listen for the following things right off the bat:
- You want to sell goods or services in Canada.
- You have (or plan to have) a physical presence or location in Canada (e.g., an office, warehouse, or employees).
- You have agents or representatives conducting business on your behalf in Canada.
- You conduct activities such as soliciting orders, negotiating contracts, or having inventory stored in Canada.
- Your business activities are habitual, continuous, and regular in Canada (not just isolated or occasional transactions).
Usually, if clients make any of the above statements, we’ll put them in touch with a Chartered Professional Accountant (CPA) who specializes in taxation and can advise on whether an entity is required.
Now, if you don’t necessarily need to create an entity, but are looking at it as an option along with an employer of record service, we can help you weigh the costs and benefits!
Legal entities and EORs: Understanding the potential costs and benefits
Upfront costs
Legal Entity
So, you want to set up a Canadian entity, eh?
Well, you’re looking at quite a few upfront costs including, but not limited to, hiring lawyers and accountants, paying federal and provincial company registration fees or investing in office space.
Depending on where your talent is located, you could be spending $5,000 or more per province to create a provincially compliant employment contract.
EOR
Typically, when bringing on an EOR partner, you’ll pay a percentage of each payroll to the EOR and a small setup fee per employee. Word of caution, though: If you’re using an EOR when you should’ve set up an entity, you could be putting yourself at risk of fines and other serious tax complications.
Compliance
Legal Entity
If you create a Canadian entity, you’re responsible for ensuring every aspect of your business is fully compliant with ever-changing federal and provincial tax and employment laws.
That means you’d need to find Canadian accountants and legal counsel and/or keep HR and employment law experts on retainer for each province employees live in - all of which comes with hefty ongoing costs.
EOR
Now, if you work with an EOR, compliance management is just part of the overall package.
A Canadian EOR should have HR, payroll and legal experts who understand provincial differences that can trip up foreign companies. They should have payroll compliance professionals who will work proactively to help you avoid fines, tax or legal issues from non-compliance. They can also help you create province-specific employment contracts, and explain payroll deductions to you and your employees - and more.
Risk management
Legal Entity
This goes hand-in-hand with compliance. If you’re creating your own entity, you assume all the legal and financial risks for your business and employees.
EOR
An EOR, however, acts as the legal employer of your Canadian workforce. You, meanwhile, direct all of their day-to-day work. The beauty of this arrangement is that it mitigates risk by having experts in Canadian payroll, HR and employment at your fingertips without the financial or legal burden of navigating the (often complicated) regulatory and legal landscapes on your own.
Team building and time-to-market
Legal Entity
Establishing a Canadian entity can take months. As in 6-12 months, on average. If you’re looking for a speedy route to market, this isn’t the way.
And once your entity is (finally) established, you will then need to recruit and build up your entire Canadian team from scratch - which is no small feat.
EOR
When you partner with an EOR, your time to onboard employees goes from months to days. And time is absolutely of the essence when it comes to recruiting top talent. An EOR can provide employment contracts, onboarding support and payroll processing to speed start up and make the entire employment lifecycle seamless.
In short: EORs handle the administrative and compliance end of things so you can focus instead on making your expansion strategy come to life.
When does it make sense to go create a Canadian entity?
One of the most common questions is if there’s a “magic number” or tipping point where it would make sense to create a legal entity over partnering with an EOR.
The reality is that it’s not so much about the number of employees you hire, as it is what your business will be doing. If you, for example, rent an office in Canada, plan to sell to the Canadian market or have any form of physical presence, then you may be required to set up an entity.
If you’ve determined that you’re not doing business in Canada, then you’re usually safe to use an EOR.
Bridgewater TI: Let’s come up with the best plan for your business
Have your eye on Canadian talent, but don’t need to create a business entity? Eager to start building your dream team and embrace remote work?
With Bridgewater TI’s stress-free Canadian employer of record service, we can help you get new employees on board in as little as a day without the costs, delays or liabilities of setting up a Canadian entity.
Talk to us today!
