Local Entity or PEO — What to Choose When Expanding Your Business Globally Here are some tips to help you decide whether a local entity or PEO is right for your business's global expansion.
By Wei Hsu Edited by Chelsea Brown
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Multinational organizations are actively pushing boundaries when it comes to cost-effective and agile ways to expand their global footprint. Global expansion, by itself, is no cakewalk. And with the world economy more uncertain than ever, it only gets trickier. Furthermore, remote work is fast becoming an indispensable reality of business, thanks in no small part to fundamental workplace changes coming out of the pandemic.
You can establish a presence in a new and unfamiliar market yourself by setting up a local entity. Alternatively, you can partner with a Professional Employer Organization (PEO) to expand into the new market far more quickly with less risk and without needing a full-fledged local presence. These are three of the key advantages of partnering with a PEO for expansion.
Amid such unprecedented and dynamic challenges, it makes sense for companies to consider the options between the DIY and the PEO method, based on their strategic goals and resources. Let's look at how you should deliberate this crucial decision and what you stand to gain by taking either route.
Related: 3 Tips for Global Business Expansion
What is a local entity?
A local entity is a full-fledged arm of your company established in a foreign country. This can be a subsidiary or enterprise that is legally owned by your parent company and is subject to all local laws and regulations of the target country. Many multinational corporations choose the subsidiary route when establishing presence in a new country.
Setting up a local entity in a new market can sometimes take years before the organization can start any operations. It involves a thorough grasp of legal compliance, business regulations, the labor market and many other areas related to the target market.
What is a PEO, and how does it work?
A PEO is an outsourcing partner that helps you expand into a new country by representing your company there and managing many of the operational issues you will face, including staffing, HR services, payroll, benefits, taxes and compliance. PEOs often provide Employer of Record (EOR) services as well, whereby they act as the official employer in your target market, functioning as an intermediary between your organization and the local government.
PEOs help you get up and running in a new and likely unfamiliar market as they're highly experienced with the law of the land. They're also adept at onboarding resources and setting up in a timely manner all necessary legal and compliance structures required by the government of the target country.
Related: Considering an Overseas Expansion? Avoid These 3 Mistakes.
When to choose a PEO over a local entity
There are quite a few advantages of going with a PEO when expanding into a new country. From saving invaluable time and resources to avoiding heavy penalties and legal complications, PEOs can eliminate much of the hassle typically associated with global expansion.
Here are a few of those benefits in detail:
Time savings
You can save valuable time by partnering with a PEO instead of trying to do it yourself. There are many barriers to market entry that can take significant time to resolve, especially when there is a lack of knowledge about the new country and its regulations. For instance, thorough due diligence about local laws and getting necessary approvals for a local entity can take many months. In contrast, a PEO can help you start operations in a new market in a week or two — a fraction of the time it would've taken otherwise.
Cost savings
Setting up a new organizational structure in a foreign market entails significant costs. Whether it's hiring the best talent, navigating complicated legalese or recurring administrative overhead, a PEO can reduce your overall spending significantly when compared to establishing a local entity on your own.
Compliance
Labor and tax laws vary from country to country, and failure to comply can lead to not just financial but also legal consequences. PEOs like INS Global can leverage their decades of expertise operating in hundreds of international markets to help you dot the i's and cross the t's.
Competitive advantage
Small- and medium-sized businesses can leverage PEOs to provide attractive benefits to potential hires that they may not be able to offer on their own. This confers an advantage as an employer of choice.
Owing to the various benefits offered by a PEO, you can consider partnering with one if:
You're testing the waters and need a short-term solution before fully committing to a new market in the form of a permanent establishment.
You're not going to hire more than 15-20 employees and don't need a local entity.
You want to keep your legal structure simple and don't plan on diversifying into multiple businesses.
When does a local entity make more sense than a PEO?
While PEOs offer fast, cost-effective and streamlined access to new global markets, they're not for everyone, or at least not always. Sometimes, taking the longer route proves better in the long run.
Opting for a wholly owned subsidiary or permanent establishment can prove the better choice for your business if:
You're committed to a region and want to benefit from country-specific incentives (e.g., R&D tax credits in the UK).
The size of your team is much more than a few dozen employees, and a local entity will prove more cost-effective.
You're diversifying into multiple businesses and incorporating import/export or government contracts into your business, which can increase legal complexity if you continue with a PEO.
Related: 6 Best PEO Services of 2023 | Entrepreneur Guide
Which one is better for your business?
Like many important decisions, this one depends on a variety of factors. Before you commit to either a PEO or a local entity, assess your strategic roadmap and weigh the pros and cons of both approaches.
Even in cases where you eventually decide to establish a local entity, it can take a long time to set up. In the interim, you can still get your business up and running by partnering with an experienced PEO, which can have you set up and running in a new country much faster.
