When you expand your business internationally, it may make sense to begin by setting up a separate, local, legal entity (such as a subsidiary company), to represent your enterprise in the target country. However, over time, it may become clear that engaging a global PEO will be a cheaper, and more efficient method, for carrying out your international operations.
In this article, we explain when you can know that it is time to switch from a legal entity to a global PEO.
What does it mean to set up a legal entity?
There are various ways in which a company expanding internationally might carry on business in a target country:
- Sending its own employees to the country to operate on its behalf;
- Entering into an agency relationship with independent individuals on the ground;
- Establishing a joint venture with a company local to the target country;
- Merging with or acquiring a company in the target country.
There are difficulties or risks with each of these options, however:
- Sending your own employees, or using agents in the target country, may leave it unclear what your tax and other legal obligations are in the country in question. For example, in some countries contractors may be deemed to be employees if they meet certain conditions, whether or not an employment contract or agreement is in place;
- A joint venture will likely require profit-sharing and shared control, and may lead to some level of disagreement between both parties to the venture;
- There may be no local entity available at an appropriate market price, for a merger or an acquisition.
Given these considerations, one useful option can be to create a new, local, legal entity in the target country. A common example is a subsidiary company of the original enterprise.
We will discuss the benefits of setting up a local entity shortly.
For more information on a related topic, see When to switch from a global PEO to a local entity
Summary: There are many ways to expand your business operations overseas. Setting up a legal entity might feel like the most straightforward option.
What is a global PEO?
A global PEO is a ‘Professional Employment Organization’ which supports the global expansion of an enterprise. It is often the best business model for start-ups and growing companies requiring administrative support. A global PEO provides many different services, which usually include:
- Becoming the ‘employer of record’ for your workforce in the target country. They take on the compliance responsibilities of the employer, but the workers still operate at your direction;
- Payroll processing;
- Administering and managing employee benefits and services, such as leave and insurance contributions;
- Recruiting the right staff for your business;
- Onboarding staff;
- Human Resources (‘HR’) services (e.g., dealing with employee complaints and disputes).
Summary: A global PEO acts as the ‘employer of record’ for your workforce, and carries out a range of payroll, human resources, and compliance tasks.
Why you might set up a legal entity in the beginning
As part of your global expansion, there are a range of reasons why you might have set up a local legal entity (such as a subsidiary company), in the target country. Possible reasons include:
- Ease of employment and compliance. By setting up an entity in the country in your target location, which is compliant with local laws and other compliance requirements, you can straightforwardly employ individuals;
- To have a branded presence of your company in that region;
- In order to enter into contracts on behalf of your company which can be settled under the laws of the target country;
- Simplifying your tax obligations and arrangements;
- Uncertainty about what other options may be available. Sometimes setting up a new legal entity feels like the most obvious way of expanding into a new country.
Summary: It may feel more straightforward to set up a new legal entity, such as a subsidiary company, in your target country when you first set up there.
What are the main reasons to switch from a local entity to a global PEO?
Many of the reasons that you may think you have for setting up a legal entity in the target country, may actually be suggestive of engaging a global PEO. With a global PEO, you can ensure that your workforce is employed in full compliance with all applicable employment and tax laws: The employees will still work at your direction, and on behalf of your company.
The key advantage of using the services of a global PEO are the cost savings. According to one study on PEOs operating within the US, small businesses that engage a PEO can grow from 7 to 9 percent faster than businesses who do not. In addition, these businesses have:
- 10 to 14 percent lower turnover of employees;
- Are 50 percent less likely to go out of business.
Exact cost savings for enterprises who use a global PEO will vary by individual case. Considerations that will impact on the cost of engaging a global PEO include:
- The location of the business;
- The number of employees per business. It is common for global PEOs to charge based on an annual fee per employee. Sometimes a percentage of an employee’s salary is charged;
- The rate may increase depending on the exact services provided. If more tasks are required, the rate will be higher.
Summary: While setting up a legal entity may seem like a sensible international expansion option, often engaging a global PEO is a more cost-effective and efficient option from the start.
Are there any other reasons why switching from a legal entity to a Global PEO makes sense?
Besides the cost savings, other good reasons to make the switch if you already have a legal entity in place include when:
- Your projects in the target country have become short/medium term;
- You are unsure that you have the ongoing expertise in the target country for ongoing compliance. By engaging a PEO you can ensure that compliance requirements are met by experts on the ground. Non-compliance in a target country is a major source of risk for any enterprise doing business in an unfamiliar country; and,
- You may have become recently aware of the services of a global PEO, whose services would make more sense to use, in your case, than running a legal entity.
Summary: As well as being more cost-effective, switching from a legal entity to a global PEO can be a better option to ensure full compliance.
In many cases, it makes more business sense to engage a global PEO for your expansion into another country, rather than setting up a separate legal entity. In general, this will be a cheaper, faster, and more efficient mechanism for beginning operations in the target country.
In other cases, it may have made sense to establish a local legal entity initially, but circumstances have changed, and it is now more cost-effective to switch to a global PEO.