How to Start a Business in China with a PEO (Professional Employment Organization)
Posted on by Carmen
What do these movies have in common: Need for Speed, Furious 7, The Great Wall, Kung Fu Panda 3, Now You See Me 2, Terminator: Genysis, Warcraft, and Transformers: Age of Extinction? By Hollywood standards, all of them are flops. However, when they were shown in China, home of 1.3 billion people, they have become global blockbusters.
This illustrates how strong the current consumer market of China is, i.e. second in the world after the United States as shown in Figure 1. This is besides the fact that China is today’s second biggest economy globally and is predicted to be the largest by 2024 according to the IHS Inc., a leading source of business insights and data.
An enterprise that makes good in China or a product that attracts the Chinese consumer market is assured of success. This is the reason why the country has become a leading destination for foreign investments. More and more companies are now bringing their businesses to China. The potential for small and medium-sized companies to expand or start their business in China is immense. This is deemed to be the best time to seize opportunities offered by China’s consumer markets.
However, despite China’s economic robustness, to actually put up a local entity onsite can prove very daunting for foreign companies. Some of the major challenges are as follows:
- The creation of a local subsidiary is very costly;
- Delays in the start of the business operation is likely due to the stringent regulations and complex procedures involved in business registration;
- Approval of licenses and permits take time, i.e. 6 to 18 months;
- There is bureaucratic interference even in private companies;
- Learning he relevant labor and employments laws cannot be done instantly, e.g. payroll processes, taxation rules, hiring and firing, etc.;
- Language and cultural barriers renders it difficult for foreigners to start the business;
- There is a seeming lack of protection for the rights of investors; and,
- There are strict requirements in relation to statutory compliance.
All the foregoing reasons can make a foreign investor, particularly of startups or small companies with limited capital, to have second thoughts about putting up their business in China and risk losing money even before the business takes off.
What is a PEO?
A good analogy for a PEO or Professional Employment Organization is that of an instant Human Resources and Administration department. It is an established entity in a particular country ready to do business for a client company. A PEO in China can be hired directly by a foreign company and immediately operate the business. This means that the need to go through application for permits and licenses, and the registration of companies, will no longer be needed.
Moreover, a PEO in China will be tasked to do all the necessary HR outsourcing and administrative activities for the foreign investor, depending on the service agreement that will be executed between the PEO and the client company.
These two parties will form a co-employment relationship. Under this business model, the employees serve as the workforce of both the PEO and the client company, thus giving the latter access to a ready-made HR, payroll, benefit, taxation and compliance infrastructure. As such, the foreign company will be able to focus on the business and how to make profit.
The client company is also able to partake in standardized HR practices and policies, training resources for employees, risk management support, workers’ compensation, health insurance coverage, benefit plans, and many other administrative and HR-related operations and requirements without lifting a finger. The PEO will provide it all for the foreign company.
The Global PEO also serves as the “employer of record.” As such, it is legally liable for the employees it recruits in China. The PEO will implement the relevant labor and employment laws, best practices, and compliance in relation to recruitment, management, termination, and other HR legal matters. This considerably decreases the foreign company’s legal risks and liabilities.
A PEO also helps mitigate normal costs relating to health insurance and employee benefits. This is made possible by the fact that a PEO take on various clients, thus pooling employees of the clients on its payroll. This enables a PEO to gain scale economies when providing services and performing tasks.
Instead of launching a subsidiary or an umbrella company overseas, a foreign organization’s life will be greatly simplified by acquiring the services of a Global PEO to act as the employer of record.
Areas covered by a PEO include e.g. HR and administration services, employee benefits, payroll facilitation, and risk and compliance tasks which may vary from country to country and the applicable laws. In detail, these services include the following:
- Migration services;
- Provision of a legal team;
- Global entity solutions for the workforce;
- Annual tax declaration;
- Training services;
- Background screening;
- Onboarding and outplacement services;
- Employee performance management;
- Drafting of relevant contracts; and,
- Other services as may be agreed upon by the PEO and client company.
To sum it all up, a Global PEO can help any foreign company that wants to start a business in China in a quick, less costly and efficient manner. When all these HR and administrative tasks are outsourced to an effective and expert entity, the client company will have the time to concentrate on the more important goals of the business. The funds saved on hiring a PEO can instead be used to further expand the business.
As the leading PEO within China, South-East Asia and the Asia-Pacific region, New Horizons Global Partners offers a solution to all the mentioned hurdles in starting a business in China. Headquartered in Shanghai, NHis a Global Professional Employment Organization (Global PEO) with strong presence in several Asian markets, and offices abroad in France and Germany.