Employer of record vs setting up a German entity

The first option is to open your own German entity, almost always a GmbH. You form the company, put in the share capital, register it, and become the direct employer of your staff. From then on the payroll, tax and compliance are yours to run.

The second option is an employer of record. We employ your staff on our own German GmbH, so you get a compliant German employee without forming anything. You direct the work and we carry the employment. The trade-off is a monthly fee against the cost and effort of running your own company.

A GmbH starts with share capital of 25,000 euro, of which at least 12,500 has to be paid in when the company is formed. On top of that come the formation costs, roughly 500 to 1,000 euro or more for the notary, the Handelsregister entry and the trade-office registration, and then ongoing costs for a Steuerberater to keep the books and file returns.

With an employer of record there is no capital to lock up and no formation bill. You pay the actual salary, the employer social contributions of around 21 percent, and our flat fee of 499 euro per employee a month. For a small number of hires that total is usually well below the cost of forming and running a company.

Forming a GmbH takes time. The articles have to be notarised, the company entered in the Handelsregister, the business registered with the trade office and the Finanzamt, a bank account opened and a Betriebsnummer obtained before anyone can be paid. In practice that runs to somewhere between two and six weeks, and sometimes longer.

An employer of record is already set up. Because we hold the entity, the Betriebsnummer and the payroll, a hire can start within days of the service agreement being signed. If speed matters, that gap is the whole point.

Owning a GmbH is not just the setup. Every year there are accounts to prepare and file, tax returns to submit, and payroll to run correctly each month. Most companies keep a Steuerberater on retainer for this, and someone internally has to own it. If a site grows, a works council, the Betriebsrat, may come into the picture with its own rights.

With an employer of record those duties sit with us. We run the monthly payroll, keep the employment compliant as the rules change, and handle the filings that come with employing someone. Your side stays focused on managing the person and the work.

The trade-offs line up cleanly once you see them together.

There is no single right answer, but the pattern is fairly consistent. An employer of record usually fits when one or more of these is true.

• You are hiring a small number of people in Germany
• You want them working in days, not weeks
• You are testing the market before committing
• You would rather not run German payroll and filings yourself

Your own GmbH tends to win once the headcount is larger and settled, or when you need the entity for other reasons such as invoicing German customers or holding local assets. Many companies start with an EOR and move to their own entity later, once the numbers justify it.