Organisations considering expansion into Africa have two options available-set up a legal entity in the relevant country or engage the services of an Employer of Record (EOR). This is an important decision to make in making an informed decision and ultimately determining the success of the planned expansion. Some of the costs and benefits that need to be weighed up are, ‘What does setting up your own local entity entail?’, ‘what can be expected when hiring the services of an EOR?’ and ‘what are the differences between the two?’.
This article break offers a cost-benefit analysis of the two options, to inform an organisation’s African expansion strategy.
An organisation would need to create an entity or foreign subsidiary should they seek to engage in business or directly employ a local or expat to work in an Africa. Very simplistically, establishing an entity requires the registration of the company with the local authorities and the establishment of physical presence (e.g., renting office space) in the country. Additional steps and requirements to consider before an entity can be considered to be legally present and able to operate include, creating a local bank account for transactions and tax purposes and understanding the regulations governing foreign companies (e.g. what Exchange Control Regulations are in place that impacts the movement of finances).
Founding a new entity in an African country is complicated, and requires strong partnerships with Legal, Human Resource, Tax and Financial local experts to ensure continued compliance with the nuanced legislation.
Ownership & Control
Establishing a legal entity gives the executives and shareholders increased ownership of the operating models in the country.
Expanded range of operations
As a registered entity, organisations may expand their scope of activity to the full extent permitted by the law. For instance, marketing products and services, importing and exporting goods or forming partnerships with the government, could be a significant advantage for an organisation’s brand recognition and growth.
Time and financial investment
Time and financial investments are the greatest challenges to establishing an entity in Africa. The more time an organisation takes in establishing the entity is time taken away from its successful business operations.
Physical office space
Identifying and setting up an office in a foreign country is difficult. Doing so in an African country, where there is often poor infrastructure or intermittent access to Wi-Fi, can be an almost impossible logistics task.
Strategic and operational compliance
Organisations strategies and operations must adhere to the country’s tax and labour legislation to prevent non-compliance penalties. Either a company needs to have in-house experts in areas of payroll, human resources, tax and legal matters, or these services must be outsourced to relevant professionals. Both options require additional time and financial investment, which further slows the launching of the organisation.
Foreign entities are generally required to pay foreign tax and entity establishment fees. Further, the in-house management of payroll requires payroll consultants to be experts in ensuring that employees (both expat and locals) are paid the correct amounts, after the various tax considerations (e.g., mandatory benefits, deductions, or withholdings)
Failure to comply with any aspect of local law can lead to sanctions varying in severity. By establishing an entity, organisations are liable for any non-compliance-related issue in their operations.
An Employer of Record (EOR) company employs workers on an organisation’s behalf. Thus, there is no need for an organization to have an entity in Africa to employ members of the workforce. Signing a contract with an EOR partner in Africa positions them as the means through which an international organisation operates locally within the country. Organisations no longer have to establish an entity, and no longer have to manage the admin intensive tasks, such as sponsoring immigration, creating legal employment contracts, managing payroll in line with relevant taxation, documenting employee leave, providing for insurance needs and facilitating employee termination or dismissal.
Reduced set up costs
Not establishing an entity in country saves a considerable upfront cost to organisations. Further, an EOR can provide an all-inclusive, upfront invoice with mapped out expenditure and budgetary requirements. This ensures that all investment is allocated to the successful launch of an organisation’s strategy into the country.
Having a partnership with an EOR offers organisation’s employees to dedicate more of their time, focus and energy to performing their core business tasks, rather than spending time on time-intensive admin tasks.
Source of local expertise
An EOR is an expert in their region of focus and can act as a guide of organisations entering a new market. This assistance extends to understanding local culture, language, and best practice, so that operations can begin in a culturally appropriate and relevant manner.
Responsibility and liability
The EOR acts as a local employer, and thus bears all the legal responsibility to ensure that all practices (e.g., onboarding, contracting and payroll) are compliant. This means that the organisation will not be liable for non-compliant practice.
Limited client company power
While employees work directly with the organisation, formally, they are employed through the EOR entity. Thus, any decision regarding an impact on the employee’s contract (increases, bonuses) or disciplinary action must be carried out through the EOR. This could impact the timelines of a decision and reduce the client’s feeling of control over the employment relationship.
Some limitations of activities
Organisations expanding into Africa may want to expand their operation further than hiring local staff. Not having an entity in place in a country could limit the activities an organisation may legally engage in (e.g., entering supply contracts or applying for government subsidies)
Africa is a continent full of possibilities, and companies expanding into Africa need to act quickly to establish themselves in local markets. Partnering with an EOR means less time dedicated to ensuring compliant practice, thus reducing the time taken to establish a presence in the country.
Opportunities in African countries can be somewhat of a mystery to the rest of the world, with many organisations being unsure as to what consumer needs in different regions may be. Should an organisation seek to test new markets, they can do so, without the significant investment of time, finances and effort required to set up a compliant entity. Testing new markets is made simpler and more accessible, as the barriers to both entry and exit are reduced.
Should an organisation seek to establish a brand in the market, to compete with a local entity already operating in the target market, it may be necessary to register an entity in time. However, in the short term, it may be more important to establish an operating model through an EOR partner, whilst dealing with the formalities of registering an entity.
If an organisation is committed to establishing a significant presence in Africa, with expanded service offerings, then it may be advisable to enter the market with an already established entity. However, whilst in the process of registering, they may still wish to fast-track entry into the country of interest in choosing an EOR solution at first.
For over 25 years now, Africa HR Solutions has been providing expert EOR services to businesses from various industries seeking to enter the African continent. Present across 40 countries and counting, we have gained considerable experience and know-how in the field.
Get in touch with us now to find out how we can help your business grow in Africa.