When to Switch from EOR to a Local Entity in Mexico
Using an Employer of Record (EOR) is an excellent way for foreign companies to enter the Mexican market quickly — without the hassle of setting up a local entity right away.
But an EOR isn’t always forever.
As your team grows and your business becomes more established, there comes a point when setting up your own local entity can be more cost-effective and offer better control.
This guide breaks down:
- The signs it’s time to switch
- The risks of waiting too long
- How to plan your transition step by step
Why Companies Start With an EOR
An EOR acts as the legal employer for your team in Mexico, handling payroll, contracts, and tax compliance.
It’s the fastest option when you:
✔️ Need to hire quickly
✔️ Want to test the market
✔️ Don’t have a registered local company yet
See more in “What is an EOR (Employer of Record) and how can it help your business?”
Signs You’re Ready for Your Own Local Entity
So when does an EOR stop making sense?
1.-You’ve Hit a Headcount Threshold
If your team in Mexico has grown to 15–20+ employees, EOR fees can become higher than the costs of running your own local payroll and HR.
2.- Long-Term Strategic Plans
Are you opening an office, manufacturing plant, or customer hub?
A local entity gives you more control for long-term investments and tax incentives.
3.- Compliance & Risk Management
Some industries, especially in manufacturing, benefit from direct employer-employee relationships under Mexican law.
Understand labor complexities in “Labor Regulations in Mexico for Startups: Everything You Need to Know.”
Risks of Staying Too Long With an EOR
⚠️ Hidden Costs: EOR fees are higher per employee as your headcount grows.
⚠️ Missed Tax Opportunities: Certain tax benefits or deductions may only apply if you have a local entity.
⚠️ Reputational Concerns: Clients, vendors, or even talent may see a local entity as a sign of stability.
👉 Internal link: Know what to watch out for in “Why Some EOR Contracts Fail in Mexico: Lessons Learned.”
How to Plan the Transition
✔️ Step 1: Do a Cost-Benefit Analysis
Compare your annual EOR fees with the estimated costs of running your own entity (legal setup, payroll admin, HR team, REPSE registration if needed).
Check outsourcing compliance in “How the REPSE affects Outsourcing companies.”
✔️ Step 2: Secure Local Legal & Tax Advisors
Mexican incorporation involves corporate tax registration, social security, and labor obligations.
✔️ Step 3: Communicate Clearly with Employees
Plan how you’ll transfer employment contracts to your new entity while respecting all labor rights.
Hybrid Models: EOR + Local Entity
Many companies don’t switch overnight.
You can:
- Keep new markets under an EOR while building your local entity in one country.
- Combine both models for flexibility.
See “How to Combine EOR and PEO Models for LATAM Expansion.”
Conclusion
Ready to go beyond your EOR?
A well-planned transition to your own local entity can reduce costs, unlock incentives, and strengthen your local reputation.
