Incorporation vs Employer of Record (EoR) in the Philippines: Key Considerations for Your Business
Key Takeaways:
- When to choose incorporation or EoR in the Philippines
- Costs and compliance obligations
- Legal and operational flexibility in each option
Introduction
For companies entering the Philippine market, deciding between incorporation and using an Employer of Record (EoR) is a critical choice. Learn the pros and cons of each option here.
Incorporation in the Philippines
Process, Legal Structure, and Costs
Incorporating a company in the Philippines requires establishing a Domestic Corporation, which is governed by the Revised Corporation Code of the Philippines. For foreign companies, this involves registering with the Securities and Exchange Commission (SEC), securing a business permit from the local government unit (LGU), and obtaining tax registration from the Bureau of Internal Revenue (BIR). The incorporation process typically takes several weeks and includes multiple steps, such as appointing directors and drafting corporate bylaws.
Depending on the industry, certain sectors may have foreign ownership restrictions, meaning that companies may need to partner with a local business to comply with ownership regulations. The financial commitment is also notable, as foreign companies are subject to minimum capital requirements, ranging from PHP 5 million to PHP 200 million (approximately USD 100,000 to USD 4 million), depending on the nature of the business.
Pros: Long-Term Business Goals, Full Market Presence
One of the primary benefits of incorporation is that it allows your business to establish a strong market presence. By incorporating, you can operate independently, build your brand, and access opportunities that may not be available to businesses using an EoR model. Additionally, incorporating in the Philippines provides full control over business operations, allowing you to make strategic decisions without the constraints that come with outsourcing employment management.
For companies with long-term plans to operate in the Philippines, incorporation may be the ideal route. It enables greater involvement in local operations, partnerships, and investment opportunities, especially in industries where having a local presence is a competitive advantage.
Cons: Regulatory Challenges, High Costs
However, incorporating in the Philippines presents significant challenges, particularly in terms of compliance and regulatory burdens. The local business environment requires ongoing administrative tasks such as filing taxes, maintaining compliance with employment laws, and adhering to local labor standards, including mandatory benefits like the 13th-month pay and Social Security System (SSS) contributions.
Additionally, incorporation requires a higher upfront investment. The cost of legal services, administrative fees, and compliance-related expenses can add up quickly. For smaller businesses or those testing the market, this option may prove too costly or resource-intensive compared to an EoR model.
Employer of Record in the Philippines
How an EoR Works for Quick Market Entry
An Employer of Record (EoR) offers a streamlined solution for businesses looking to expand into the Philippines without the need to incorporate a local entity. Through an EoR, a third-party service provider becomes the legal employer of your staff in the Philippines. This means the EoR takes care of payroll, compliance, and human resources, while you focus on managing your employees’ day-to-day tasks and business strategy.
This model is particularly attractive for companies seeking a quick market entry, as it significantly reduces the time and cost associated with setting up a business in the Philippines. An EoR handles the administrative and regulatory responsibilities, allowing you to scale your workforce without the need for a physical office or extensive legal knowledge of local employment laws.
Pros: No Need for a Local Entity, Less Compliance Stress
The key advantage of using an EoR is that it removes the need to establish a local entity. This can save significant time and money, especially for businesses that want to test the market or maintain a smaller presence in the Philippines. The EoR service provider assumes responsibility for all employment-related compliance, including tax withholdings, employee benefits, and social security contributions.
This solution is ideal for companies that want to focus on core business activities without being bogged down by the complexities of local regulations. The EoR manages everything from hiring and onboarding to handling termination processes in compliance with Philippine labor laws, including the Labor Code of the Philippines.
Cons: Limited Direct Control Over HR Practices
While an EoR offers many advantages, it does come with some limitations. One downside is that companies have less control over certain HR processes, as the EoR provider is the legal employer of record. This can affect how employment contracts are structured and the extent to which you can offer customized benefits packages or employment terms.
For businesses seeking to establish a strong, autonomous presence in the Philippines, this lack of control may be a disadvantage. Companies using an EoR also may face limitations in sectors where having a local entity is required for certain types of business activities or investments.
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Comparing Costs and Compliance Risks
Cost of Setting Up an Entity vs. Partnering with an EoR
When comparing the costs of incorporation and using an EoR, it’s important to weigh the upfront expenses of setting up a legal entity against the ongoing costs associated with an EoR service. Incorporation typically requires significant initial capital, including fees for legal counsel, government registrations, and setting up local infrastructure.
On the other hand, using an EoR model involves a service fee that covers employment management, payroll, taxes, and compliance. While the cost of an EoR may seem higher over the long term, it often represents a cost-saving solution for businesses that don’t want the financial burden of establishing a permanent entity.
Compliance Issues and How EoR Mitigates Them
Incorporating a business in the Philippines comes with heavy compliance obligations, including the need to adhere to tax laws, labor regulations, and employee benefits requirements. Businesses must stay up-to-date with changes to labor laws and ensure that they meet all legal obligations to avoid penalties or fines.
An EoR greatly reduces compliance risks by handling these issues on behalf of your business. The EoR provider is responsible for ensuring that all employees are paid according to local wage laws and receive mandatory benefits, including SSS contributions, PhilHealth, and Pag-IBIG Fund membership. By using an EoR, your company can mitigate the risk of non-compliance while focusing on core business operations.
Which Option is Best for Your Business?
Deciding Factors: Business Goals, Scale, and Risk Tolerance
Choosing between incorporation and using an EoR depends largely on your company’s business goals, scale, and risk tolerance. If you plan to establish a long-term presence in the Philippines and want full control over your operations, incorporation may be the better option. It allows for a stronger market presence and offers greater flexibility in how you manage your business.
However, if your primary goal is to enter the market quickly and with minimal risk, partnering with an EoR offers an efficient and cost-effective solution. This model is ideal for companies that want to avoid the regulatory and administrative challenges of incorporation while maintaining flexibility in scaling their workforce.
How AYP Can Help
Expanding into the Philippines doesn’t have to be a complex, time-consuming process. With AYP’s Employer of Record (EoR) services, your business can hire and manage employees in the Philippines without the need to establish a local entity. AYP handles all HR-related tasks, from payroll and tax compliance to benefits administration and legal requirements.
By partnering with AYP, you can focus on growing your business while we ensure full compliance with Philippine employment laws. Whether you’re testing the market or planning a long-term presence, AYP provides a seamless, low-risk solution for expanding into the Philippines.
