There are many reasons why enterprises expand internationally: access to new markets, cheaper (or better qualified) labor, and market diversification, are all commonly cited. The difficulty is working out how to arrange an international expansion into a target country. Here we set out why a specific business model, engaging a Professional Employer Organization (‘PEO’), is often a good approach.

The Risks of Expansion ‘On the Fly’

An enterprise might think that there is no real need to ‘formalize’ an overseas expansion – Simply engage an agent based overseas, or international contractors, and get them to work on behalf of the enterprise. This a bad idea, however:

• The enterprise could unknowingly become liable for paying tax in the new country. Even engaging an agent in a new country can make it liable for corporate income tax as a ‘dependent agent permanent establishment’;
• The enterprise may lose control over crucial business assets. For example, intellectual property laws in the target country may not automatically protect assets. Or, it may be the case that a clause in a contract restricting competition is an ‘illegal restraint of trade” in that country;
• Profits could suffer. Expanding this way, an enterprise is unlikely to know the intricacies of the market in the target country. This is particularly true where the language is unfamiliar;
• Compliance difficulties. It may be a compliance requirement to have a legal presence ‘on the ground’ in the target country.

The Obvious Option: Set up a Company On the Ground

So, given the importance of having an official presence in a target country, what is the best way of arranging this? Perhaps the most obvious step would be to set up a new legal entity in that country. Commonly, international enterprises set up a subsidiary company in the target country. This does have a range of benefits:

• Taxation and compliance obligations become more straightforward;
• The subsidiary company is able to directly employ staff in the target country;
• It ensures that the enterprise has a branded presence in the target country;
• The enterprise can straightforwardly enter into contracts in the target country, under local laws.

Why You May Want to Consider a PEO

A PEO operates with multiple branches or entities in different countries, all of which are set up to operate as a compliant employer in the target country. This means they can employ a workforce, on behalf of the client enterprise, in the target country. It ensures that all tax, payroll, human resources, and other compliance obligations in the target country are complied with.

Many of the reasons that might be suggestive of setting up a legal entity in the target country, may actually lead a business to engage a PEO. One study looking at PEOs within the US found that, by using a PEO, businesses can grow from 7 to 9 percent faster than businesses who do not. Furthermore, this study suggested that those businesses have a 10 to 14 percent lower turnover of employees and that their chance of going out of business is reduced by half.

The success of the PEO model comes largely down to cost: In most cases, it is a much cheaper model of expansion than setting up a new company. However, in addition to cost savings, working in this way also ensures that business operations are set up quickly (sometimes within days) and in full legal compliance.

But, perhaps the biggest benefit of engaging a PEO is that it saves you the headache of identifying and reaching the best candidate and adding them to your team. From posting to the right job boards to sorting through resumes, adding new talent to your company can be really time-consuming and cost you thousands of dollars. In fact, according to the Society of Human Resource Management, finding a new employee could cost companies up to $4,129 and take at least 42 days. So, if you don’t have that much time and the budget for it, you can use a PEO for recruitment.

Besides managing essential HR processes, including recruiting, interviewing, and hiring new employees, PEOs also manage workers’ compensation and unemployment, saving you from paying some fines. Certain workers’ compensation and unemployment costs differ by country and state. They can also be really tricky if you are not familiar with the specific requirements of the area where you’re planning to expand your business. Obviously, if you mess them up and fail to pay or pay incorrectly, you may have to pay some fines.

What’s more, PEOs know how to track your employees’ performance. If you lack significant managerial experience, you may struggle to track your employees’ performance and to find ways to improve it. Or, you may simply not have the time to do it. Luckily, PEOs can help with this one too by providing employee performance tracking software and even supervisor coaching.

How Do I Choose Between the Two?

Either option, setting up a company, or engaging a PEO, may be a good idea, depending on the business and its goals. Advantages of setting up a local company may include:

• Benefits and incentives. In some cases, an enterprise will need a company incorporated in a country to get access to various benefit and incentive schemes in that country. For example, Research and Development (R&D) tax credits in the United Kingdom require that a limited company be incorporated there;
• A base for broader business operations. The speciality of a PEO is to engage the workforce of an enterprise in a new country. However, for other purposes, it may be helpful to have a formal legal presence in the country. For example, suppliers may feel more comfortable entering into contracts with a locally registered entity.

Engaging a PEO may be the more sensible option where:

• Speed is essential. It is usually a much quicker option than to set up a fully operational subsidiary company;
• Expansion prospects are uncertain. An enterprise can scale up or scale down its presence in a country cheaply and quickly depending on the success of the expansion;
• Costs need to be minimized. It can be much more cost-effective than setting up a subsidiary company.

Conclusion

When expanding an enterprise overseas, enterprises do need to consider how to make their expansion formally compliant. However, it is a mistake to think this requires a new local subsidiary of the enterprise. In many cases, Global PEO is a cheaper and quicker mechanism that ensures full compliance with local labor laws.