PEO vs. Wholly-Owned Subsidiary: Which India Entry Model Fits

01Two ways to legally employ someone in India

If you want to hire in India without an existing entity, you have two real options: use a PEO or Employer of Record (EOR) — a third party that legally employs your India team on your behalf — or incorporate a wholly-owned subsidiary and employ people directly. A third option, misclassifying hires as independent contractors, isn't a real option: it carries backdated PF, ESI, gratuity, and EPFO penalty exposure of up to 25% per worker, and Indian labor authorities actively audit for it.

02Head-to-head comparison

03Where the math flips

EOR pricing is typically a flat per-employee monthly fee — commonly in the $130–200 range per hire, on top of gross salary and statutory contributions. That's an efficient way to employ 2, 5, or 15 people quickly. It stops being efficient once headcount and timeline both point toward permanence: at 25–40+ people, or any point where you're confident India isn't a short-term experiment, the flat per-head fee usually exceeds the amortized cost of running your own compliant entity.

The other trigger is control. ESOPs, custom HR policy, and direct IP ownership all require a subsidiary — an EOR structurally can't offer them, because the EOR is the legal employer, not you.

04The hybrid path most companies actually take

• Start on EOR

  Hire your first 1–10 people through an EOR while you validate that India is the right long-term market for your team.

• Incorporate in parallel

  Once headcount commitment is clear, start entity incorporation — it takes weeks, so starting early avoids a hard stop later.

• Transition employees

  Move EOR-employed staff onto the new entity's payroll once it's operational — a planned transfer, not a scramble.

• Scale on the entity

  All hiring beyond the transition point happens directly, with full control over HR policy, ESOPs, and IP.

This sequencing — EOR now, entity in parallel, transition on your timeline — avoids the two most common failure modes: over-committing to a subsidiary before you've validated the market, or staying on EOR fees so long that you're paying a permanent premium for a temporary structure.

05What a subsidiary actually requires

A wholly-owned subsidiary in India means real regulatory sequencing: company registration (Private Limited is the common structure for foreign-owned entities), PAN, TAN, GST registration, a corporate bank account, and — for software exporters — an STPI or SEZ registration decision made early, since it affects where you're allowed to lease office space. None of these are individually slow, but they're commonly run in the wrong order, which is what actually causes multi-month delays rather than any single step being inherently slow.

06Decision framework

• Choose EOR if: you're hiring under 10–15 people, still validating India as a market, or need someone employed this month, not this quarter.
• Choose a subsidiary if: you're already committed to India, need ESOPs or direct IP ownership, or expect to cross 25–30 people within 12–18 months.
• Choose the hybrid path if: you're confident in direction but not yet ready to commit fully — the most common real-world answer.

06What due diligence looks for, either way

Whichever model you choose, investors and acquirers evaluating your company will ask the same underlying question during diligence: is your India team's employment status clean? For an EOR arrangement, that means a clear, current contract with the EOR provider and confirmation there's no shadow misclassification risk in how the relationship actually functions day to day. For a subsidiary, it means clean PF/ESI filings since incorporation, properly executed offer letters compliant with the 2025 Labour Code's Basic-plus-DA requirement, and — if ESOPs were granted — a defensible plan document and cap table.

Founders who treat India employment structure as a formality to revisit "later" consistently find it surfaces at the worst possible time — during a funding round or acquisition, when there's no time left to fix eighteen months of undocumented decisions. Building the record correctly from the first hire, regardless of which model you choose, is meaningfully cheaper than reconstructing it under diligence pressure.

FAQFrequently asked questions

Cost figures reflect publicly available EOR pricing benchmarks as of 2026 and vary by provider, role, and contract terms. This is a general decision framework, not advice for your specific entity structure — confirm current requirements with a qualified advisor before committing.