PEO VS Subsidiary – What’s Best for International Business Expansion in India?
Previously, we went over 5 ways businesses can expand in India. We mentioned PEO, subsidiaries (business entities), outsourcing, freelancing, and Indian partnerships. In this blog we investigate two of those methods: PEO and subsidiary formation, as means of business expansion in India.
- What is PEO?
A Professional Employer Organization (PEO) is an organization that provides joint employment services with an employer looking to acquire personnel. A PEO leases employees and undertakes shared responsibility of managing human resources.
- What Is A Subsidiary / Business Entity?
A subsidiary or business entity is a corporation which is wholly or partially owned by another company which is known as the parent company / holding company. The holding company enjoys a controlling interest in the subsidiary corporation (more than 50% shares ownership).
Comparing PEO With Subsidiary Formation
Choosing either PEO or subsidiary formation will depend a lot on your unique circumstances and goals. But to objectively compare these two methods of international business expansion in India, we evaluate 4 important parameters of business growth: cost, speed of deployment and mobility, control over business and policy decisions, and risks involved.
- What is more costly: PEO or Subsidiary Formation?
Incorporation of a foreign subsidiary company in India has substantial costs of formation and registration. Depending on the notarizing authority, subsidiary formation costs anywhere between INR 50,000 and INR 2,00,000. You have to withstand additional costs of business compliance and running the business. Moreover, you have to supervise the regular operations of your business, which is an added cost in terms of your time.
On the other hand, PEO is far cheaper. PEO costs are calculated per employee. Sometimes, they are straight costs, which range between 100 – 400 US dollars. Some PEOs might charge in percentages of the employee salary, which vary between 8 to 18%. However, there are no overheads of business compliance or resource management as those are handled by the PEO.
All things considered, the net cost of PEO services in India are lower than subsidiary formation.
- How fast can you get moving with PEO and Subsidiary Formation?
Through co-employment (PEO), you can setup and deploy a branch office of your foreign company in India with zero delays. Once you’ve identified the resources and the PEO service, you can kickstart business operations in 24 hours.
On the other hand, setting up a business entity in India involves a delay of 2-4 months. This is because a holding company practically owns your subsidiary. Every decision needs to go through their pre-existing hierarchies. Once all decisions are verified, then you can commence business operations. Until then, you are in limbo.
- How much freedom do you have in PEO and Subsidiary Formation?
Every business-owner has a vision in mind while charting the course for business expansion and growth. More often than not, the vision matters more than the profit figures and bragging rights of having setup offices in India.
With subsidiary formation, when it comes to policy decisions, you don’t have much flexibility, as you need to adopt the policies of the holding company. But when it comes to control over business operations, you fare better in subsidiaries than in PEO.
With PEO, you enjoy better control over policy decisions. Your employees will adapt your policies. This includes total control over pricing as well. However, when it comes to day-to-day business operations, you end up ceding control to the PEO. This will include working hours, number of employees on a project, infrastructure and physical resources etc.
- What Are the Risks Involved in PEO and Subsidiary Formation?
With a business entity, you face difficulties in close-down as there’re lots of binding regulations. You have to deal with stipulations which keep you from shutting down operations at just any moment. You may get caught up in acquiring no objection certificates or triggering a bankruptcy clause. With PEO, you circumvent that risk and can close shop any moment (considering a notice period).
However, there are other risks in PEO. Your staff may not associate with a PEO agency. Sometimes, the employees have difficulty in understanding the nature of the joint employment and the overall PEO model.
The Remunace Way of Business Growth
Business growth is always exciting. You may have looked forward to setting up offices in India for a long while. But the complications of actually expanding to India may trip you up. You might become spoiled for choices. Remunance has a way that has the best of both worlds of PEO and subsidiary formation. We recommend starting with PEO services in India, growing steadily, gaining market success, and then transitioning into a business entity. If you feel further qualms over international business growth in India, allow us to help.