EOR vs PEO vs local entity: which one do you need?

Quick answers

The five questions people ask first.

The three models, defined properly

Providers use these terms loosely. Here is what each one actually means.

Employer of record

The EOR is the legal employer. It holds the employment contract, the payroll registrations and the statutory obligations in the country. You have a service agreement with the EOR, and the EOR has an employment contract with the person. The employee reports to your manager and works on your systems. If the relationship ends, the EOR handles the local termination process, and you fund whatever the law requires. You need nothing in the country: no company, no bank account, no tax registration.

Professional employer organization

A PEO is a co-employment arrangement. Two employers share one employee. The PEO is typically the employer for payroll, tax reporting and benefits, and you remain the employer for the work itself. The model grew up in the United States, where it lets small companies pool into larger benefit plans. Abroad, it only works where co-employment is recognised and where you already hold a registered entity. A PEO reduces your admin. It does not remove your need to exist locally.

Your own local entity

A subsidiary or branch that you incorporate, capitalise and register for tax, social security and employment. You are the sole employer. You sign contracts in your own name, appoint directors, keep statutory books, file accounts, and answer directly to the labour authority. Everything an EOR does for you, you now do yourself or pay advisers to do.

The fact to hold onto: a PEO needs you to have an entity in the country. An EOR needs you to have nothing. That difference decides most cases on its own.

Side by side

Ten factors, three routes.

The decision walkthrough

Work through these five questions in order. The answer usually falls out by the third.

1. How many people in this country?

Headcount is the biggest lever. Below roughly a dozen people in one country, the EOR wins on cost, speed and simplicity, and it is not close. The entity's fixed costs are the same whether you employ two people or forty. Somewhere in the teens the lines cross, and where depends on how expensive incorporation and compliance are in that country. Some markets make a small subsidiary cheap and quick. Others, like China or Brazil, make it a serious project with its own staff.

2. How long will the team exist?

A twelve month project, a pilot, a single specialist, a market test: all EOR. An entity takes long enough to set up that a short engagement can be over before the first payslip. A permanent operation with a multi year horizon starts to justify the entity, if the headcount is there too. Uncertainty about duration is itself an argument for the EOR.

3. How many countries?

One country with a large team is an entity question. Six countries with two people each is an EOR question, because six entities means six sets of accounts, directors and auditors. Many companies end up with both: an entity where they have a real operation, and an EOR everywhere else. That is a sensible end state, not a compromise.

4. Are the roles regulated, or do they create a taxable presence?

Some activities need a licensed local company: taking deposits, giving regulated advice, dispensing medicines. An EOR can employ the person, but it cannot hold your licence. Separately, a salesperson who negotiates and closes deals in a country can create a permanent establishment for your parent company, whether they sit with an EOR or not. If you are going to be taxable there anyway, the entity is often the cleaner answer. For engineering, support or back office roles, this question rarely changes the outcome.

5. Do you plan to raise or sell?

Diligence teams like clean structures. A subsidiary with its own accounts is easy to read. So is an EOR arrangement with one service agreement and a tidy list of employees. What diligence does not like is a pile of contractors who are employees in substance. If you plan to sell a country operation as a unit, an entity gives you something to sell. If you plan to raise on the strength of a distributed team, an EOR is perfectly acceptable.

The honest summary. EOR wins for under roughly a dozen people per country, for anything temporary, and for any multi country footprint. The entity wins for large, permanent, local operations, for regulated activity, and where you are going to be taxable in the country regardless. The PEO only enters the conversation once the entity exists, and then only as a way to outsource its payroll and HR administration.

Six mistakes buyers make

• Buying a "global PEO" without an entity. If you do not own a company in the country, you are buying an EOR. Ask the provider who the legal employer is and whose registrations the payroll runs under.
• Incorporating for a team of three. The most common expensive error. The entity feels permanent and serious, then carries accounts, audits and filings for years while the team stays small. Start with the EOR and move when the numbers justify it.
• Assuming the entity removes compliance risk. It concentrates it. With your own entity, every misstep in payroll, leave, working time or termination is yours, with no provider standing in front of you. Countries with layered collective agreements, like Italy and France, are demanding to run in house.
• Comparing on salary instead of total cost. Contributions, mandatory benefits and provider fees change the ranking of countries and of models. Compare on the fully loaded line, using the calculator and the country guides.
• Using contractors as a fourth option. A contractor agreement is lawful when the person is genuinely independent. For a full time role on your systems, it is misclassification waiting to be found, and the back payments make both the EOR and the entity look cheap.
• Ignoring the exit before the entry. Ask how you leave. With an EOR, you end the assignment or transfer the people. With an entity, you liquidate, which in some countries is slower than setting up. In Mexico and Germany, the termination side deserves as much thought as the hiring side.

How moving from EOR to your own entity works

Most companies that grow in a country eventually make this move, and it is less disruptive than people expect.

1. Set up the entity while the team keeps working. Incorporation, tax and social security registration, a bank account and a payroll provider. The EOR carries on in parallel, so there is no gap in employment or pay.
2. Agree the transfer date. Usually the first day of a payroll period, so the last EOR payslip and the first entity payslip line up cleanly.
3. Issue new contracts on your entity. The terms should match or improve on the EOR contract. Local law often treats the move as a transfer of employment, so seniority, accrued leave and notice entitlements carry across. In the United Kingdom, a transfer of this kind can fall under specific transfer of undertakings rules, and the mechanics differ from a fresh hire.
4. Settle accruals. Untaken leave, bonus accruals and any end of service amounts are either carried across or paid out at the transfer point. The right treatment depends on the country. Get it written down before the date.
5. Move benefits. Private medical, pension and insurance plans held through the EOR end on the transfer date and yours begin. Avoid a coverage gap.
6. Hand over the records. Payroll history, leave balances, tax references and signed documents move to you. Your first entity payroll should reproduce the last EOR payslip exactly.

A good EOR treats this as a planned outcome, not a defection. At Dryft there is no lock in and no exit fee for transferring people to your entity. Some companies keep the EOR for a smaller group in the same country after the move.

FAQ

This page is general information, not legal, tax or immigration advice. Timelines and headcount thresholds are planning guidance, not rules, and the position differs by country and changes regularly. Confirm the route with a qualified adviser before acting. Last reviewed September 2026.