For many businesses expanding internationally, using a global PEO is the best option. However, in other cases, it may be more sensible to establish a local legal entity (such as a limited liability company), in the new country.
In this article, we look at when it may be a good idea to switch from a global PEO to a local legal entity.
Note, this is general information. For expert advice tailored to your circumstances, we recommend you seek professional advice.
Which business model should you choose for your international expansion?
When you have made the decision to expand globally, you need to consider what the best legal structure for your enterprise might look like in the new country. You should consider whether to:
- Use contractors. You may wish to avoid any formal mechanism in the new country and, instead, simply engage independent contractors in the country in question to work on behalf of your company. This is risky, however: Your enterprise may acquire tax liabilities in that country (through a ‘dependent agent permanent establishment’). In addition, enforcing contractual clauses overseas may be difficult, and you may unknowingly incur employer obligations;
- Set up a joint venture. You might use a joint venture to partner with a local company. One possible consequence of this move is reduced autonomy for your enterprise, as the joint venture partner gains some control over the project;
- A merger or acquisition with/of an existing company in the new country. In this arrangement, the existing enterprise merges with or gains an ownership stake in a company in the new country;
- Working with a global PEO;
- Set up a new legal entity, such as a subsidiary of your existing company.
In this article, we are looking at these last two options. We examine when it might be a good idea to switch your business model from a global PEO arrangement to a brand new entity.
What does a global PEO do?
So, what is a global PEO (sometimes referred to as an ‘international PEO’)? It is a specialist human resources (HR), payroll and employment company, which operates in the new country you intend to expand into. It acts as the ‘employer of record’ for your workforce in the new country, and takes on many legal and compliance obligations in that country. To clarify the liabilities and obligations of both parties, the enterprise (‘the client company’), enters into an agreement for services with the global PEO. Global PEOs carry out a range of functions, including:
- HR services. This includes compliance activities, administering employment contracts, termination, severance pay, and other related services;
- Payroll services. Payroll processes are handled in accordance with local laws and any tax requirements;
- Benefit administration. In addition to pay, global PEOs administer employee benefits and insurance cover;
- Tax. Global PEOs work out, and follow through on, tax and social security contributions;
- Risk and compliance services. Global PEOs can manage risks associated with employment in the new country, including any employee complaints or legal action, and dealing with worker’s compensation.
When does a global PEO make sense?
As part of your expansion strategy, you have likely identified the new country as an excellent business opportunity for your enterprise. But there are still no guarantees. Mitigating risk by using a global PEO makes a lot of sense in many cases. Advantages include:
- Speed to market. Establishing a legal entity in a new country can take several months, depending on the country in question. By contrast, a global PEO, as a turnkey employment solution, enables you to get to work within days;
- Compliance. Employment and tax laws are likely quite different in the new country than they are in your own. This means it is unlikely that you will not be immediately familiar with all the obligations you will have as an independent legal entity in the country in question;
- Cost. Establishing a fully compliant legal entity in the new country can be an expensive proposition. By using a global PEO, you are able to ‘test the market’ at a cheaper price, than if you were to establish a legal entity straight away.
When does setting up a new legal entity makes sense?
In some cases, it will make sense to set up a legal entity in the country in question. This might, for example, be a subsidiary company of the enterprise, or some other legal form, such as a trust. While every case differs, when might this be sensible?
- Country-specific benefits and incentives. Once you have been in a country for a period of time, you may wish to access funding or incentives that are only available to businesses with a legal entity in that country. For example, generous Research and Development (R&D) tax credits in the United Kingdom are only available to limited companies incorporated in that country;
- Cost. If your operation in the new country is large enough, it may be cheaper to set up a new entity, as opposed to paying ongoing fees to a global PEO;
- Wider business operations. Global PEOs specialize in supporting businesses with their workforce in a new country. However, you may also want to carry out other businesses in the new country. In order to conduct business in the country in question, it can be an advantage to have an official legal presence of the enterprise there. While franchising, licensing and use of agencies may be an option, it often more straightforward from a legal and compliance perspective to set up a separate, local, legal entity;
Even in those cases where it is sensible to set up a legal entity in the new country, the process can take time. In those cases, it may make sense to utilize a global PEO in order to get started immediately, while you wait for the entity establishment process to be completed.
Often it makes sense for an enterprise to use a global PEO initially, but over time, as the business grows, in the new location, switch to a new legal entity.
When your enterprise grows into a new country, you need to think carefully about the business model that is most appropriate. A global PEO is an excellent option for smaller expansions, or where there is uncertainty about the prospects in a new country. Establishing a legal entity (such as incorporating a company) may be more appropriate when you intend to establish a larger operation with a more substantial footprint.
In order to know which model is most suitable for you, you should seek the advice of a global PEO and foreign company incorporation specialist: New Horizons Global Partners can advise you on whether and when a PEO or setting up a new legal entity is the right move for your business.