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When to Shift from PEO to Legal Entity

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Alex Margolin
August 12, 2019

In the past a company looking to hire workers abroad only had one real option – to open a legal entity in each country where it wished to operate. It needed the legal status in order to run a proper payroll in compliance with all tax laws and labor regulations.

The process took time, effort, and money. Today, businesses have more efficient options for hiring workers abroad without having to open an entity. They can work with a Global Professional Employment Organization (PEO) to hire in another country. With a Global PEO, a local supplier or ICP, becomes the employer of record and the Global PEO assumes the liability.

A Global PEO is ideal for small or medium size companies looking to hire a small number of workers, often in the range of 1-5, in a foreign country for a short or open-ended period or for hyper growth companies who need to ramp up their hiring at speed. There comes a time though when its necessary to move from a Global PEO/EOR arrangement to opening a local entity. We take a look at those signals

Signals For Opening a Local Entity

While a Global PEO offers the quickest entry into a foreign market, the employees are still under the official employ of the PEO or a local employer of record. Ultimately, that limits the options employers have when it comes to contracts. Working through a PEO signals to potential partners that the company may not be as stable in its local presence as it would be with a legal entity and all of the obligations that go with it.

Employment expert Nirvano Brans, EVP Sales at Papaya Global, lists three factors that could indicate the time has come to move from Global PEO to a legal entity:

A long-term strategy for overseas expansion;

Having maximum agility makes sense for a company in the early stages of an overseas operation when it is unsure how large a workforce it will need. But once a strategic decision has been made to build either a foreign subsidiary or an overseas branch, it becomes cost-effective to open a legal entity.

Having a legal entity allows a company to engage in better tax planning and apply for grants, subsidies, and incentives in a particular country.

It also allows businesses to build their company culture in the new market. When employees feel connected to the long-term goals of their company and feel part of its mission, they are more engaged as workers and more likely to remain with the company, reducing the need to hire and train their replacements, saving costs in the long term.

A substantial number of employees

A Global PEO makes it easy to hire and pay workers, especially when the number is lower than the costs of opening an entity. At a certain point, however, it becomes more cost effective to open an entity to pay workers. It allows the company to eliminate the fees it pays to the PEO, which are typically based on the number of workers, and it lets the company take advantage of better tax rates in some countries.

“At some point, it simply makes more sense to employ rather that outsource employment,” Mr Brans said. “This threshold depends on many circumstances but I typically see the tipping point around 15-20 workers in one country. That’s typically the point where companies realize they’ll stay in the country for longer period or permanently and that’s where having an entity with payroll becomes more cost effective.

“It also depends whether they have 15 people on day one or if it takes them five years to get to 15. In the former case they may decide sooner that it’s worth establishing permanently.”

Plans to engage in full commerce and contracts

A Global PEO provides speed, agility, and risk mitigation. That’s ideal for the early stages of a business in a new market. As a business matures and its presence is more established, speed and agility become less important than presence and stability.

A full legal entity could also open up business opportunities that were unavailable, such as engaging in supplier/client contracts through local billing and invoicing.

“Clients may be hesitant to do business with a company that’s not actually registered in that country,” Mr. Brans said.

Papaya Provides Global PEO Services and Helps Establish Legal Entities

Papaya can help your company navigate the challenges of global expansion, our global PEO works has with in-country partners in more than 140 countries to serve as employers of record. We also provide guidance and support for companies seeking to move from Global PEO to full local entities to ensure each company maximizes its potential at every stage of growth.

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