PEO Vs Legal Entity

PEO Vs Legal Entity

Today, we’re living in a world where international market expansion has become easier than ever before due to the increasing popularity of remote working. The COVID-19 pandemic has made remote working the center of attention of every organization’s employment strategy and has made it commonplace irrespective of which corner of the world you’re operating in. Having said that, while pursuing global business expansion, there are multiple options available to startups and SMEs in terms of how they can choose to enter a new geography. Some of the most commonly known options are listed below: 

In this article we will focus on the first two options listed above which are considered to be more comprehensive, effective and safer solutions for international market expansion. 

One of the most critical factors to be considered while hiring a workforce in a new geography is ensuring 100% compliance with local employment and labour laws. While there may be some commonalities, each country typically has its own set of unique labour laws which every employer is expected to abide by. Failure to do so typically attracts heavy penalties and legal action which could make a big dent in a startup or SME’s business expansion plans. Consequently, it becomes imperative to choose the right mode of entry for foreign SMEs while expanding business to a new territory.

A PEO (Professional Employment Organisation) is essentially an agency which acts as the legal employer in another country on behalf of a foreign company (the actual employer) and enables it to hire employees in that country. While the employee would remain on the PEO’s payroll, he / she would be in direct contact with the actual employer thereby giving the foreign company direct control over a dedicated workforce. A PEO agency offers cost-effective solutions relating to HR, payroll, benefits and risk management and is a preferred route of entry for:

  • Starting business operations in a new geography within days without setting up a legal entity or infusing additional time and resources to ensure 100% compliance with local labour and employment laws.
  • Hiring a dedicated workforce in a new territory and maintaining control over the quality and standard of operations by having direct contact and coordination with its remote workforce in the new region.
  • Extending the company’s work culture and policies to its employees in the new geography as these would be mutually formulated by the foreign company and its PEO agency.
  • ‘Testing the waters’ in the new market before getting into the hassles of establishing a legal entity for subsequent business expansion.

In a nutshell, foreign startups and SMEs can benefit greatly from going the PEO route (especially in the initial phases of expansion) as the agency would completely take over all the non-core business activities in the new geography along with the responsibility of ensuring 100% compliance with local laws on behalf of the company, leaving it with enough bandwidth to focus on growing the core business. Making a heavy investment in terms of money and resources in setting up a legal entity at this stage would not only prove to be a cumbersome and time-consuming choice but also a commercially imprudent one. 

Setting up a legal entity in a new geography, on the other hand, can be considered to be a preferred route of business expansion if:

  • The business is experiencing rapid growth in the new territory
  • The business already has a large employee headcount in the new region 
  • The foreign SME would like to take advantage of tax holidays and benefits
  • The business in the new territory has outgrown the PEO model

Foreign companies typically go in for this option once they are absolutely sure of expanding the business in a particular region after having tested the market (typically via the PEO route) and are already on a path of rapid business expansion in the region. This is mainly because setting up a legal entity is a time consuming and tedious process and would only make sense once a critical mass is achieved to justify the investment of money and resources. In most cases, companies prefer to enter a new territory via the PEO route and then set up a legal entity at a later stage if all goes well. So, if you’re a foreign startup or SME planning business expansion to India, Remunance’s PEO service is exactly what your business needs. Remunance is regarded as one of the most reputed Indian PEOs who, unlike a regular PEO agency, goes one step further to provide extended services like leave management, recruiting, employee training, office infrastructure and HR support over and above the typical PEO services. In fact, the team of experts at Remunance are also very well equipped to handhold you in setting up a legal entity in India and ensure a seamless transfer of power and resources to the new local entity once it becomes the need of the business.