Transitioning from an Employer of Record (EOR) to a local legal entity requires registering the new entity, drafting local employment contracts, terminating EOR agreements, and migrating payroll.
This complex, time-intensive process usually takes 3 to 6 months and demands careful management of employee benefits, data privacy, and compliance to prevent legal liability or talent turnover.
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What are the key steps for transitioning from an EOR to a legal entity?[toc=Steps for Transitioning]
If you've been hiring in India through an Employer of Record (EOR) and your team has grown past 5-10 employees, you're likely reaching the point where setting up your own local legal entity makes more financial and strategic sense.
From what we've seen helping global companies navigate this transition, the companies that plan ahead avoid the most expensive mistakes.
Here's what the process actually looks like:
1. Evaluate Whether It's the Right Time
EOR providers charge per-employee fees that scale quickly. Once you cross roughly 5-10 employees in India, establishing your own entity often becomes more cost-effective than continuing with an EOR solution.
Beyond potential cost savings, watch for these triggers:
- Permanent Establishment (PE) risk: If your EOR employees are performing revenue-generating activities over a sustained period, local tax authorities may classify your operations as a permanent establishment, triggering corporate tax requirements you didn't plan for.
- Local restrictions: Some jurisdictions cap how long you can hire through an EOR arrangement.
- Scaling limitations: Sponsoring employee visas, opening facilities, or importing goods typically requires your own local presence.
2. Review Your EOR Contract
Before starting the incorporation process, dig into your existing EOR agreement. Look for notice periods, termination fees, employee data transfer obligations, and any outstanding payments like unused vacation accruals or pending payroll cycles. You want a clean break with zero surprises.
3. Incorporate Your New Entity in India
For most foreign companies, the preferred structure is a Private Limited Company under the Companies Act, 2013. The process is largely digital through the MCA portal and includes obtaining Digital Signature Certificates for directors, reserving a company name, and filing the SPICe+ form, which bundles incorporation with PAN, TAN, EPFO, ESIC, and GST registration into a single application.
Incorporation itself typically takes 7-10 working days, but plan for 2-3 months total when you include post-incorporation steps like opening a local bank account, filing the INC-20A declaration, and registering with local indirect tax authorities. You'll need at least 2 directors (one must be an Indian resident), though foreign nationals can own 100% of shares in most sectors.
Read more: How to Register a Company in India?
4. Set Up Payroll and HR Infrastructure
Once your new entity is live, you take over everything the EOR was handling. This means setting up payroll systems (or outsourcing to a local provider), registering with EPFO, ESIC, and Professional Tax authorities, drafting local HR policies, and ensuring your tax filings and compliance are squared away. We've seen companies underestimate this step, and payroll errors in the first few months are more common than you'd think.
5. Transition Your Employees
Legally, you're ending one employment relationship (with the EOR as the legal employer) and starting a new one under your entity. Even though nothing changes in employees' day-to-day work, you need to handle this carefully:
- Draft new employment agreements that comply with local labor laws, covering statutory benefits, retirement plans, and notice periods.
- Review existing salaries and benefits to ensure parity or improvement. Any downgrade creates attrition risk.
- Settle all accruals with the EOR, including unused leave and bonuses.
- Coordinate provident fund transfers with social security authorities.
- Communicate early with your team. Transparent communication about what's changing (and what isn't) makes a real difference in retention.
6. Align the Timelines
The most common pitfall we see is timing. You don't want overlap where you're paying both the EOR and running your entity, but you also can't afford a gap in employment coverage. Start planning at least 3-6 months before your target go-live date so both transitions align cleanly.
7. Handle Ongoing Compliance
Once the switch is complete, you're the legal employer. That means managing payroll, filing taxes, maintaining compliance with local employment laws, and handling all the administrative tasks your EOR provider used to cover. If you don't have in-house local expertise, partnering with a compliance or payroll provider is well worth the investment.
What are the critical considerations when switching?[toc=Critical Considerations]
The transition from EOR to a legal entity isn't just an administrative task. It's a strategic growth decision that touches compliance, employee experience, cost, and risk.
From our experience working with growing companies making this switch in India, here are the considerations that matter most:
- Compliance: Transferring employees from an EOR to your own entity means ending one employment relationship and starting another. In India, you'll need to ensure all statutory benefits (EPF, ESI, gratuity) carry over without gaps, and new employment agreements comply with local labor laws. Getting this wrong can lead to disputes or penalties from local authorities.
- Permanent Establishment Risk: An EOR doesn't eliminate PE risk. If your team has been performing revenue-generating activities in India for a sustained period, local tax authorities may already consider you to have a taxable presence. Transitioning to your own entity actually resolves this risk rather than creating it.
- Cost: EOR fees typically run $200-$600+/employee/month. Once you cross 5-10 employees, setting up your own entity in India (which costs roughly $3,000-$8,000 to incorporate, plus $15,000-$30,000/year in ongoing compliance and admin) often works out cheaper. Do the math for your specific headcount before deciding.
- Timing: Entity setup in India takes 2-4 weeks for incorporation, but 2-3 months when you factor in bank accounts, payroll registration, and tax filings. Plan at least 3-6 months ahead so there's no gap or overlap between the EOR and your new entity.
- Employee Retention: Your team will notice the switch. Make sure salaries, benefits, and employment terms under the new entity match or improve what they had under the EOR. Any perceived downgrade creates attrition risk.
- Expertise: Engage local legal and tax counsel to manage the transition process. Many EOR providers don't offer incorporation services, so you'll likely need a separate partner with local expertise to handle entity setup, payroll systems, and ongoing compliance.
- Data and Payroll Continuity: Ensure clean transfer of all employee data, compliance documents, and payroll records from the EOR. Align your first payroll cycle under the new entity with the last one under the EOR to avoid payroll errors or gaps in paying employees.
Get Started With Wisemonk EOR[toc=Choose Wisemonk EOR]
Not ready to set up your own entity in India just yet? That's completely fine. In fact, most growing companies start with an EOR and transition to their own legal entity once the team size and business operations justify it.
That's exactly where Wisemonk fits in.
We help 300+ global companies hire, pay, and manage employees in India, handling everything from compliant employment contracts and payroll processing to statutory benefits, tax filings, and local HR policies.
And when you're ready to make the switch to your own entity, we don't disappear. We help you plan and execute a smooth transition, so there's zero disruption to your team or business operations.
Here's what you get with Wisemonk EOR:
- Fast onboarding: Start hiring in India in days, not months.
- Full compliance: We handle EPF, ESI, professional tax, TDS, and all local employment laws so you don't have to worry about payroll errors or penalties from local authorities.
- Transparent pricing: Starting at $99 per employee/month, no hidden fees, and no surprise termination charges. You know exactly what you're paying.
- Entity transition support: When you outgrow the EOR model, we help you transition employees to your own legal entity with zero compliance gaps.
- India-specific expertise: We're not a global platform trying to cover 150 countries. India is all we do, and that local expertise makes a real difference in getting things right.
Whether you're hiring your first engineer in India or planning to scale a 50-person team, Wisemonk gives you the flexibility to start fast and grow on your terms.
Book a free consultation to see how we can help you build your India team compliantly, and plan your transition from EOR to entity when the time is right.
Frequently asked questions
Can I use an EOR and set up my own entity at the same time?
Yes. Many companies use an EOR to keep hiring while their entity incorporation is in progress. Once your new legal entity is operational, you transition employees over. This way you don't lose hiring momentum during the 2-3 month setup window.
Is there a legal time limit for how long I can use an EOR in India?
India doesn't have an explicit statutory cap on EOR duration like some countries (e.g., Germany's 18-month limit). However, the longer you operate through an EOR with a growing team, the higher your permanent establishment risk becomes, which is why most companies plan the switch within 12-18 months.
What happens to employee stock options (ESOPs) during the transition?
ESOPs and share-based compensation need to be restructured under the new entity. You'll need to reissue grant agreements, ensure compliance with Indian tax regulations on equity compensation, and communicate the changes clearly to employees so there's no confusion about vesting schedules or tax liabilities.
Do I need a local Indian resident as a director for my entity?
Yes. Under the Companies Act, 2013, a Private Limited Company in India requires at least two directors, and at least one must be a resident of India (someone who has stayed in India for 182+ days in the previous calendar year). Foreign nationals can hold the remaining director positions and own 100% of shares.
Can I use the same EOR provider to help with entity setup?
Most EOR providers don't offer incorporation services. You'll likely need a separate partner with local expertise for entity setup, tax registration, and compliance. Some providers like Wisemonk offer both EOR services and entity transition support, which makes the process significantly smoother.
What are the risks of staying on an EOR for too long?
The biggest risks are permanent establishment exposure (which can trigger double taxation), rising per-employee costs, and limited operational flexibility. You won't be able to open a local bank account, sponsor employee visas, import goods, or build a credible local brand presence while operating through an EOR.
Will my employees need to serve a notice period with the EOR before joining my entity?
Technically, the transfer ends the EOR employment and starts a new one with your entity. Notice periods depend on the terms in the existing employment contracts with the EOR. In practice, since employees continue working for the same company in the same role, most EOR providers coordinate a seamless handover without enforcing notice periods, but always confirm this in your EOR contract before planning the switch.
