Business Expansion in Peru – Three Ways to Begin Operations

If you have decided to expand your business to Peru, it is important to consider your options for hiring employees and establishing operations. There are three principal ways to get your business up and running, and each one has its benefits. Choosing the most appropriate option based on your company’s needs will maximize the efficiency of your investment.

Establishing a legal entity is the most time consuming and complex of the three expansion options. However, it gives you the most control over your workforce and operations in a foreign country and is the only option that allows you to hold fixed assets like real estate. If you have completed a thorough market investigation and are committed to a long term growth investment in Peru, company formation is likely the best option. This can be accomplished in 6 weeks with the help of an experienced local partner.

While there is a more significant investment of time and money when establishing a legal entity, some businesses choose to outsource back office tasks related to PEO/HR Outsourcing, accounting, tax advisory and legal representation to external specialists to reduce complexity and time spent on non-core activities. This allows them to become operational faster with a smaller team and put their principal focus on strategic instead of administrative tasks.

Having a presence in-country is especially important in Latin America for developing trust with clients and business partners. For example, importing products to sell through a distributor is quite common, but local partners are insistent that you demonstrate a high level of commitment and investment in the relationship before deciding to work with you. Local businesses have been burned by foreigners in the past by having a mindset of “trust but verify” and have shifted to “verify, then trust”. This is particularly relevant for products or services with an after-sales component (as opposed to FMCG for example).

Hiring foreign employees: when planning to hire foreigners with your Peruvian company take in mind that the foreign employees must not exceed 20% of the workforce and receive no more than 30% of the company’s total payroll.

Advantages:

• Maximum control over company operations and employees
• Relationship building with local partners and customers
• Fixed asset holding is possible with a legal entity

Disadvantages:

• Significant startup and operating costs
• High exit costs when liquidating the company

In Peru, a country where labor law favors employees, hiring independent contractors gives you more flexibility and involves less risk. It gives you the option to grow or decrease your workforce quickly and without the risk of labor disputes or the obligation to pay indemnity. As contractors are not employees, benefits are not included in the compensation package. For that reason, it can be the most cost-effective option if you are simply looking to take advantage of a low-cost labor force, perform a temporary project, or test the market before investing in a more permanent commitment.

The risk involved with contractors is the same as in any other part of the world. You’ll have limited oversight or control over their activities. Therefore it is important to thoroughly vet candidates to ensure a proper fit and stay in constant contact to make sure your time and resources won’t be wasted.

Paying contractors is a wise method to run your business expansion plan, however, can also be difficult, due to tax difficulties and mountains of complex admin work. For that reason, Ongresso offers a unique International Payment Service to facilitate these payments with ease.

Advantages:

• Low cost, low complexity
• Quickest startup
• Minimal liability

Disadvantages:

• Lack of control over contractors’ activities
• Lack of loyalty of the contractor due to the more casual nature of the collaboration
• Lack of legal entity limits your options to operate

Personnel Outsourcing, also called PEO (Professional Employer Organization), allows you to formally hire employees in Peru without having to establish a company. The company acting as PEO will hire employees on your behalf as the “Employer of Record”. It will perform all HR-related tasks such as offer formal work contracts, affiliate the employees with social security, pay their salaries and benefits, terminate their employment etc. This allows you to directly manage your employees and develop your business in a foreign market such as Peru, without the burden of managing a local entity and the challenges of navigating local laws and regulations.

One of the biggest risks when expanding abroad is compliance issues due to a lack of know-how about the specific legal and tax obligations in each country. The PEO will eliminate this risk for you. It has a legal presence in the local market and will hire and pay your employees in compliance with local laws and norms, and thus effectively eliminate your exposure.

The PEO option is ideal for small and medium sized companies who want to become operational fast, focus their resources on their core activities, control their costs, limit their risk, and establish a strong bond with the people they decide to hire. A distinction between PEO and hiring an independent contractor is that top talent will typically expect a salary package that includes benefits, social security, bonuses etc. not offered to independent contractors. Besides acting as PEO, Ongresso can help you put together enticing packages that will get your top candidates’ attention, so you can form the team you need to achieve your goals.

Advantages:

• Stable, formal employment with enticing packages to attract the best talent and build long-term relationships with your employees
• Build your own team quickly and at little or no fixed cost
• Local support from the PEO saves you time by performing HR-related tasks while maintaining your compliance and helping you navigate the intricacies of market

Disadvantages:

• Limited visibility in the market due to lack of legal entity
• Limited operational options due to lack of legal entity

The descriptions above are summaries of the available options, but it is important to keep in mind that there are countless unique scenarios that could apply to any particular company. Your company structure, strategy, and needs will all affect your market entry plan. By pairing Ongresso services with any of the options above, you can also create hybrid strategies that tailor to your preferences. You can also add additional Ongresso services such as strategic consulting, HR recruiting etc.

As market specialists in Peru we have the expertise to assist you your expansion business efforts based on your unique needs. Deciding on the right market entry strategy is a complex process with many unknowns and inherent risks. Partnering with Ongresso simplifies this process by reducing complexity, saving you countless hours of researching local regulations and norms, and giving you peace of mind so you can focus on your core business. Contact us to determine which strategy is optimal for your business.