Entity or No Entity – That is the Question

Alex from Business Development is at is again. That department has grandiose ideas of taking our nice stable 20-year-old company and creating a global giant in the next 24 months or die trying. Alex keeps telling us “There is a great market opportunity out there, and we need to get at it now! If we are not there now, our competitors will enter and own the space” and blah, blah, blah…

So what does that mean for me, and my merry little band of men and women, who support the onboarding, managing and paying of said new employees? Oh and did I mention, that they tell us after the fact that they have hired someone in said new location without consulting us? “No worries,” I talked to the employment lawyer, and he put together an employment contract for Jane. “In both languages too!” he exclaims proudly.

Feel a headache coming on now. So, I respond, “How exactly do you think we are going to pay this new person in Germany?” “By direct deposit!” Alex snorts.

Close eyes now. Do not make scrunchy face. Walk away. Just walk away.

I return to my department and gather my group. “Team – Let’s put our heads together. We need to pay someone in Germany this month, France, and Spain next month. And I hear a rumor about Mexico for later this quarter. What do we need to consider? Let’s walk through the steps.”

Step 1: Is this employee a contractor or truly an employee?

Based on Alex’s comments and the fact that we have an employment lawyer involved, it appears that this person will be an employee. Contractors are easier to pay in the short-term, but could potentially cause problems in the future if they are utilized for too many months on a single project. Many governments see through the “contractor agreement” and will require companies to treat a person as an employee if he or she works anywhere from 6 to 18 straight months for a single company. Governments like to get their employer matches to their social security programs!

Step 2: Do we have a local legal entity?

a. If yes, then we are well on our way to having a payroll set-up. We will need to find a provider, register for payroll, and implement a local payroll. Since this is a one-person payroll, we can probably get our accounting firm to help us out. If the payroll grows larger than a single person, we can find a local provider to manage the payroll. All in all, it looks like we will be able to get Jane paid in timely and compliant manner.

b. If no, we have to look at other options. (See Step 3 & 4)

Step 3: Are we planning on opening a legal entity in that country for business purposes?

1. If yes, we need to determine timing. If the entity set-up is near-term, companies often employ one of the following options to get Jane paid:

a. If the entity is opening within a few weeks, companies will often hold off on paying the employee until the entity is up. Sometimes an advance is paid, which will be taxed with the initial payroll. When the advance is run through that initial payroll, it is important to reduce the net distribution in that cycle by the amount that was paid to the employee in the prior month. Otherwise, we would be overpaying the employee.

b. If yes, but the entity is several months away from being finalized, other options must be considered:

i. Companies can go the consulting route and pay the person as a contractor for several months until the entity is opened. Many new hires do not like this option, as they have to secure their own benefits and manage the filing of their personal taxes. In many countries, benefits are covered as a part of statutory filings with payroll so a person can potentially not be covered for medical, disability, etc. during this time frame.

ii. Go the Professional Employers Organization (PEO) route for an interim period. The PEO will allow the company to have locally compliant hiring practices while finishing with the entity set-up.

c. If no, go to Step 4

Step 4: Do we need a local entity to register for payroll?
1. If no, we can just register our UK entity for payroll purposes in the new location. For example in France and Germany, we do not need a legal entity to register for payroll. In Mexico and Spain, we do need a legal entity.

2. If yes, then we can go the PEO route until the legal entity is set-up or we can use this option indefinitely. A PEO will “hire” our employee in country; manage all the benefits, payroll calculations, filings, and disbursements. This solution is great for small numbers of employees or short durations. One caution on PEO’s – they can be expensive. PEO’s often charge a percentage of TOTAL employer’s costs (which includes salary, bonuses, benefits, employer taxes, etc.) often at a rate of 15 to 25%.

So we think we are all set with Jane. She is in Germany; all we need to do is register our UK office for payroll and then use our local accounting provider to handle the payroll for us. Whew, it looks like we are going to make it.

Just as I smile at solving our immediate issue, Alex sticks his head into my office and asks, “What do you know about Russia?”

This article was previously published in Global Payroll </a href>.


Asset or Equity? That Is Question One