In today’s international climate, companies are encountering compelling business opportunities when starting operations in foreign markets. For example, increasing the business’ revenue due to a larger base of customers, as well as finding a new talent pool with distinctive mindsets and skills. However, in order to start operations in an international market and, above all, hiring local employees, companies must go through various procedures ―complete documentation required in the country, follow proper protocols, comply with regulations, taxes, and laws, among others.
In this case, there are two main options for conducting business overseas: establish and incorporate a foreign legal entity in the target country or partner with an International Professional Employer Organization (PEO).
Foreign Entity Establishment vs. International PEO
For helping you determine which of both options ―Foreign Entity Establishment vs. International PEO― best suits your business needs, we will explain their main characteristics and advantages.
Foreign Entity Establishment
Incorporating a company in foreign markets is an excellent approach for expanding your commercial activities while optimizing your presence across boundaries. Nonetheless, you must first comprehend and comply with the essential legal requirements for setting up a representative office or organization. For example.
- Establish a legal address for your business.
- Appoint a legal representative ―who should have the legal right to live and work in that country, and knows the local language for fulfilling each procedure.
- Get a tax identification number.
- Specify your business activities ―choosing a suitable legal structure depending on your company’s commercial needs, such as Limited Liability Company (LLC), Corporation, Foreign Branch Office, Simplified Shares Company, etc.
- Determine your capital (the total of your foreign investment).
- Open a corporate bank account.
Certainly, the registration process may represent a challenge when it comes to time and money. For example, to set up a medium-sized company in Latin America, it is required to comply with approximately 27 different payments in terms of tax obligations. Also, in this region, the time for obtaining an electricity connection takes around 66 days (more than two months).
Eventually, you will also have to consider the costs of dealing with all Human Resources aspects, as well as the maintenance and operations of your legal entity over its lifetime, which can be both costly and time-consuming.
Moreover, with a foreign entity establishment ―apart from having access to local talent― you will maintain full control of every single activity or operation in your company, from Human Resources to commercial relationships.
An International Professional Employer Organization (PEO) is a co-employment model that focuses on helping small and medium companies with their expansion overseas, without the need to set up or establish a foreign legal entity in the target region. In this sense, PEO partners take care of the essential Human Resources tasks of your business, such as:
- Employee recruitment and management (qualified staff).
- Payroll and tax compliance.
- Employment liabilities (laws and regulations).
- Workers’ compensations and benefits (health and life insurance).
- Creation of safe work environments.
As PEOs manage your Human Resources tasks, you will have more time for your commercial activities in order to benefit your company’s growth. According to statistics of the PEO industry, businesses partnering with a PEO grow around 7% to 9% faster; reporting, also, lower employee turnover rates.
In terms of financial benefits, PEO partners reduce the administrative costs per employee, which is around 450 dollars lower in comparison with companies that establish a legal entity.