A major challenge of expanding a company’s operations to a new country are the legal and administrative requirements of employing staff. To reduce the complexities, many businesses initially hire a Professional Employer Organisation (PEO) in a new country to handle a variety of tasks concerning their workforce. This allows the business leaders to focus on their core operations.
However, the business may eventually want to establish a legal entity as it grows. This guide outlines when and how to transition from contracting the services of a PEO in a foreign country to establishing one’s own legal entity.
- Reasons for companies transitioning from a PEO include: establishing a more permanent presence, gaining more control over HR and employment policies, and potentially saving costs over the long term.
- To transition from a PEO to a legal entity, companies need to assess their options, register for taxes, obtain permits and licences, transfer employees, establish HR policies, and manage payroll and benefits.
- Ensuring compliance with all legal and contractual obligations is essential throughout the transition process.
- Ultimately, establishing a legal entity can provide long-term benefits for companies expanding into a new country.
When to move from a PEO to a legal entity?
Choosing the ideal time to transition from a PEO to an established legal entity is critical. A PEO provider handles payroll, benefits, and HR functions, assuming most of the associated risk factors while allowing the company to focus on its primary operations. However, there will come a point in the company’s growth when the benefits of establishing a legal entity overtake the benefits of outsourcing to the PEO. This transition point is driven by a range of factors, which include:
The benefits of an established permanent and physical presence
One of the main reasons companies may want to transition from a PEO to a legal entity is to establish a permanent presence in their new market. PEOs are normally employed temporarily and are most suitable for companies entering a new market who want a quick setup of operations.
However, by transitioning to a legal entity, whether a subsidiary, branch, or representative office, the business can benefit from a physical presence, because it allows it to build better relationships with local stakeholders, customers, and partners. This not only strengthens the company’s market position but also paves the way for broader market reach, improved brand awareness, and long-term growth potential.
Full engagement in commercial activities
If a business plans to actively engage in commercial activities, moving from a PEO to a legal entity will likely be necessary. This requirement arises as many markets require businesses to establish a local legal presence before entering into contractual agreements and conducting commercial activities. Establishing a business entity enhances the capacity to participate in transactions, negotiations, and collaborations.
Better control over employment policies
Another reason to transition from a PEO to a legal entity is to have control over HR and employment guidelines. When companies use a PEO, they have little control over the HR functions, and it may be difficult to develop policies tailored to their specific needs.
However, by establishing an entity, the company will gain more control over their HR and employment policies. They can also better address labour-relations issues such as overtime work, leave policies, benefit packages, talent acquisition, and employee development.
More comprehensive risk management
Even though PEOs provide HR compliance assistance and assume many of the associated risks, the final responsibility for maintaining legal compliance depends on the organisation. Transitioning to a legal entity provides companies complete control over their risk management and compliance strategies. This allows businesses who have the resources to tailor risk management measures to their needs and priorities. By taking full responsibility for compliance and risk management, businesses can better protect their interests, maintain their reputations, and build foundations for long-term growth.
Moving from a PEO to a legal entity may result in long-term cost savings. Initially, PEOs can be an attractive option, offering a cost-effective method of managing HR functions and payroll, especially for businesses looking for a fast way to establish a presence in a new market. However, the financial situation can change as a company grows and employs more staff. By establishing a legal entity, they can explore more options, such as internally handling HR and payroll tasks, local partnerships, or sourcing, which can lead to cost savings.
How to transition from a PEO to a legal entity
Preparation and implementation are necessary to seamlessly transition from a PEO to a legal entity. Before the transition, companies should consider their long-term business goals, the complexities of their HR and payroll obligations, and the legal and financial requirements of establishing a legal entity. If the company aims to establish a permanent presence in the country, opting for a legal entity will ensure long-term growth and compliance, in addition to tailored HR and payroll policies that meet the company’s needs.
Once the company has decided to establish an entity, it must choose the most suitable option, as each entity has both advantages and disadvantages. The options include establishing a branch office, subsidiary, or representative office. Here is a brief comparison:
Branch offices allow companies to expand into a new country while the parent company maintains direct operational control. However, they are not separate legal entities, and the parent company may be held liable for the branch’s debts. Representative offices have low setup costs and are ideal for conducting market research, but they are restricted to non-profit activities and, like branches, are not considered separate legal entities. On the other hand, while subsidiaries are separate legal entities and suitable for business expansion, they are more expensive to set up and have reduced operational control.
The entity must then be registered with the local government and receive the necessary licences and permits to legally operate the business. After establishing the entity, the next step is to transfer the employees from the PEO to the new legal entity. It is essential to ensure that all employment contracts are properly transferred during this process. The last step is setting up HR and payroll systems, policies, and processes. Acclime has dedicated guides for this process in multiple countries. The guides can be found in the Resources section of each country’s website, indexed here.
Even though transitioning from PEO services to an established legal entity can be challenging, there are several advantages for businesses wishing to build a more substantial presence abroad. Companies can have more control over HR and employment regulations by creating a legal entity, which may also result in long-term cost savings. It is crucial to carefully plan and carry out the transfer to ensure a seamless procedure and compliance with all legal and contractual requirements.
How Acclime can help
If you are considering transitioning from a PEO to a legal entity, Acclime can help make the process smooth and hassle-free. Our team of legal and financial experts has extensive experience helping companies establish legal entities in various markets worldwide. Contact Acclime to learn more about how we can assist you in making a successful transition to a legal entity.