Do you want to start a PEO business? If YES, here is a 19-step guide on how to start a professional employer organization firm with no money or experience. A Professional Employer Organization (or PEO) is an external company that takes care of their clients’ human resource (HR) needs. Note that this includes payroll, employee on boarding and off boarding, benefits, workers compensation, and compliance with any state or federal employment laws.
A PEO can also handle recruiting and training. A lot of businesses are typically grouped together in a PEO, and the PEO has formed partnerships with large insurance companies so that its members benefit from the ‘power of numbers’ and have access to a large array of benefits at reasonable prices.
Table of Content
- Difference Between a PEO and a HR Firm
- 1. Understand the Industry
- 2. Conduct Market Research and Feasibility Studies
- 3. Decide What Niche to Concentrate On
- 4. Know the Major Competitors in the Industry
- 5. Decide Whether to Buy a Franchise or Start from Scratch
- 6. Know the Possible Threats and Challenges You Will Face
- 7. Choose the Most Suitable Legal Entity (LLC, C Corp, S Corp)
- 8. Choose a Catchy Business Name
- 9. Discuss With an Agent to Know the Best Insurance Policies for You
- 10. Protect your Intellectual Property With Trademark, Copyrights, Patents
- 11. Get the Necessary Professional Certification
- 12. Get the Necessary Legal Documents You Need to Operate
- 13. Raise the Needed Startup Capital
- 14. Choose a Suitable Location for your Business
- 15. Hire Employees for your Technical and Manpower Needs
- 16. Write a Marketing Plan Packed With ideas & Strategies
- 17. Develop Iron-clad Competitive Strategies to Help You Win
- 18. Brainstorm Possible Ways to Retain Clients & Customers
- 19. Develop Strategies to Boost Brand Awareness and Create a Corporate Identity
Difference Between a PEO and a HR Firm
Have it in mind that PEOs differ from other HR outsourcing firms because they become co-employers to all clients businesses. It is very important to state that co-employment is when both organizations (i.e. business and the PEO) share legal responsibility for the employees.
In this arrangement, employment responsibilities are typically divided between the PEO and the business owner. The business owner maintains essential management control over the work performed by the employees. The PEO, meanwhile, takes responsibility for work such as reporting wages and employment taxes.
The main responsibility of the business owner is writing a check to the leasing company to cover payroll, taxes, benefits and administrative fees. Even though a lot of business owners confuse PEOs with temporary help businesses, the two organizations are really quite different.
Note that temporary aid companies recruit employees and assign them to client businesses to help with short-term work overload or special projects on an as-needed basis; while PEOs, on the other hand is when a client business generally turns over all its personnel functions to an outside company, which administers these operations and leases the employees back to the client.
19 Steps on How to Start a Professional Employer Organization Firm
1. Understand the Industry
Just like we already noted, a professional employer organization (PEO) is a business that provides a service under which an employer can outsource employee management tasks such as employee benefits, payroll and workers’ compensation, recruiting, risk/safety management, training and development.
Also note that the PEO does this by hiring a client company’s employees, thus becoming their employer of record for tax purposes and insurance purposes. This practice is known as co-employment. By 2010 alone, there were more than 700 PEOs operating in the United States, covering 2-3 million workers. We believe that PEOs operate in all fifty U.S. states.
You can also find similar services in Sweden and Germany. This type of service in the United States started in the late 1960s by three businessmen, Eugene Boffa, Louis Calmare and Joseph Martinez. But its unique concept was popularized by Marvin R. Selter, who leased the employees of a doctor’s office in Southern California.
Note that the Employee Retirement Income Security Act of 1974 (ERISA) contained an exemption for multiple employer welfare arrangements (MEWA) which provided a loophole for employers with leased employees to claim they were exempt from the ERISA requirements.
We believe that the passage of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) further encouraged employee leasing by providing a tax shelter for employers who contributed a minimum amount to employee plans. More stringent guidelines in the Tax Reform Act of 1986 later eliminated most of the TEFRA incentive, however.
But recently a new business has also developed in which a marketing or brokering company serves to connect businesses with professional employer organizations. A lot of these sites receive a commission if they arrange a contract between a PEO and a new business client.
Note that the sites earn their money by “brokering” for various PEOs and receiving compensation for contracting PEO relationship. The State Unemployment Tax (SUTA) arbitrage, commonly referred to as “SUTA dumping,” happens when an employer with a high unemployment insurance rate transfers or “dumps” employees to purchased subsidiaries with lower unemployment insurance rates.
Also have it in mind that in a PEO relationship, the client company takes the Professional Employer Organization’s SUTA rate by law, which often reduces their SUTA through SUTA Arbitrage. We believe that the owners of professional employer organizations are in a position to commit fraud by keeping the funds deducted from employee pay checks instead of paying the insurance and government entities for which the deductions were made.
2. Conduct Market Research and Feasibility Studies
- Demographics and Psychographics
Note that staffing services have operated and are still operating in all sectors of employment. But this industry operates within a niche market. The many specializations that exist today make the staffing industry much more complex, as well as far more interesting than it has ever been before. You need to consider this aspect very carefully, and things to consider may include;
- Local supply and demand
Professional Employers need both temporary employees and clients to survive. This is why you need to choose your niche, make sure you know the types of jobs available in your area and the potential labour supply. For instance, if there are 5 factories in your town, don’t rule out industrial placements. Also if you decide to focus on office and clerical positions, you will find that it is possible to specialize even further. A lot of professional employer firms specialize on providing midlevel administrative support staff to Fortune 500 companies.
Note that if you have a background in a particular field, it can serve as an important advantage in several different ways. Apart from being able to better assess applicants for jobs in that field, your experience can also lend credibility to your service. Experience can also make you feel more comfortable serving an industry with which you are familiar.
- Economic feasibility
We believe that most times a market niche might be a natural choice due to financial reasons. For instance, it can also be difficult to get hospitals, nursing homes and other medical institutions to pay in a timely manner, so owners go into higher-end clerical staffing instead.
3. Decide What Niche to Concentrate On
We sincerely believe that this is the best time to be in this industry. Even with the 2000-2002 economic downturn, this industry is beginning to gain steam again and future prospects are bright. In the first quarter of 2003, U.S. sales of temporary and contract staffing services rose 5 percent, to $13.1 billion.
It is very important to state that the personnel supply services sector, which includes the Professional Employer Organization industry, is expected to grow rapidly over the rest of the decade as the economy expands. Experts believe that more jobs will be created in personnel supply services than in any other industry over the next few years.
They also expect that personnel supply services will be the fifth fastest-growing industry through 2010 to 2020. In this business, your niche can be the industry you choose to pitch your tent or the services you can offer. Things to consider may include;
Professional Employer Organization services take on qualified candidates as employees. Such services not only pay their employees, but also withhold income tax and pay workers’ compensation, disability and unemployment insurance.
Indeed almost all companies have clients and products. In the Professional Employer Organization industry, clients are the companies that contract for labour or expertise, and the product is that very labour or expertise. Also professional employer organizations are in business to make money, which they do either by adding their mark up to all labour charges or by charging clients a finder’s fee.
Professional Employer Organization services provide business organizations with a life line in all sectors of employment, from industrial to clerical to professional.
Level of Competition in the Business
Note that each state in the U.S. has differing regulations for workers’ compensation insurance and state unemployment insurance, so PEOs are typically regulated at the state level. For example, in 2004, President George W. Bush signed into law the SUTA Dumping Protection Act of 2004, which means that all 50 states enacted anti-SUTA-dumping legislation by 2007.
Note that a lot of states have now done so; however, federal law does not prohibit companies from using a PEO to obtain more favourable SUTA rates. Also have it in mind that the industry itself has also taken steps to address abuses.
It formed its first trade association, the National Staff Leasing Association, in 1985. The association changed its name to the National Association of Professional Employer Organizations in 1994 to reflect the term in current usage.
Also as a means of the industry’s self-regulation efforts, an independent accreditation body, the Employer Services Assurance Corporation (ESAC), was formed in 1995. ESAC verifies accredited PEOs’ compliance with important ethical, financial, and operational standards and provides financial assurance of the performance of key employer obligations by these PEOs.
This financial assurance is backed by over $15 million in surety bonds and assures PEO clients, employees, insurers and government authorities that accredited PEOs are meeting their contractual and fiduciary responsibilities. From our vast research, we believe that PEOs may also undergo a certification process conducted by the independent Certification Institute (CI) formed in 2002.
This certification verifies that a PEO’s workers’ compensation (WC) program is meeting proven insurance industry risk management best practices to reduce work-related accidents and health exposures and control WC insurance losses.
For instance, in 1985 there were approximately 275 staff leasing companies in operation. In 2012, according to NAPEO, there are now approximately 700 PEOs operating in all 50 states. They were responsible for approximately $81 billion in gross revenue in 2010.
4. Know the Major Competitors in the Industry
There are various well-known brands in various sectors of the American economy. In the professional employer organization, the case isn’t different. Here are some house hold names;
- Ahead Human Resources
- Alcott HR
- Best Employment Solutions Team
- Employer Solutions Group
- Oasis Outsourcing
- Premier Employer Services
It is very important to note that the industry gets even more interesting when you examine the different sectors within it. This services industry is divided into the following sectors:
- Office and clerical
This accounts for roughly one-third of this general industry’s revenue and payroll. It covers secretaries, general office clerks, receptionists, administrative assistants, etc.
Currently, it accounts for one-third of the general staffing industry’s revenue and payroll and includes the following positions: manual labourers, food handlers, cleaners, assemblers, drivers, tradesmen, maintenance workers, etc.
Note that this combined sector used to be broken into several smaller divisions, including professional, technical, health care and marketing. But all these areas have been growing, thanks to shifts in the market as more people with higher skill and education levels look for the flexibility provided by temporary and contract work.
5. Decide Whether to Buy a Franchise or Start from Scratch
Note that the success of your professional employer organization company is directly tied to the lines of business you choose to open. Also note that one of the primary motivators for owning a franchise is it allows you to go into business for yourself, but not by yourself. This is because you are buying into a proven business model and leveraging a formed brand with a built-in customer base.
Have it in mind that franchising is not for everyone. Even though you are an owner, you must give up some independence. And it needs a significant capital investment to get started. It is also important to state that instead of having to reinvent the wheel, a franchisee gets a lot of support from the franchisor right out of the gate, offering a better chance for success. A franchise owner often receives help with:
- Site selection for optimal traffic with consideration for locations of competitive businesses
- Design and construction of physical facilities
- Financing to cover initial franchise fees plus start-up costs
- Training to learn the business and proven operational methods
- Grand opening programs to jump start the business
- National and regional advertising to grow sales
- Routine business operations to maintain best practices for optimal efficiency
- Access to bulk purchasing agreements from approved vendors to hold down operating expenses
- On-going supervision and management support if you run into problems or have questions
6. Know the Possible Threats and Challenges You Will Face
A lot of companies opt not to use a PEO because they want to remain in control of benefit plans, carriers and risks. If their employees love their current benefit carrier, but the PEO wants to move to a different one, there isn’t much the company can do.
Also lot organizations also decide to keep the human resources function in-house, opting to invest in technology tools to increase the efficiency of the team. Companies who are thinking of using a PEO for HR services must ask:
- Will the PEO make a commitment on the number of hours a week they will provide HR support?
- Would they come on-site for an emergency?
- Will they provide a dedicated contact, or will your employees have to communicate with several different people?
- Do they truly have the best interests of your employees at heart?
- Will they be able to make impartial recommendations, knowing that they could be legally liable for their advice?
We believe that the answers to the above questions will determine whether outsourcing HR is the best choice for your organization. Note that in addition to these challenges, some companies struggle with the delineation of employer responsibilities between them and the PEO. If the PEO makes a mistake when filing taxes, is the employer responsible? Who would the IRS penalize? What are the employer’s options for recourse?
Also the last disadvantage to working with a PEO is often the pricing structure. PEOs frequently bundle services together and charge a flat rate. Employers should be sure to ask about what services are included in the bundle to ensure they are getting exactly what they need—no more and no less.
7. Choose the Most Suitable Legal Entity (LLC, C Corp, S Corp)
You need to understand that the legal structure of your business will have to be based on the size and scale of the business. But since this business solely is all about the income and property of your clients, the LLC is the best legal entity for your business be it small, medium or large.
Note that the advantage of creating an LLC typically outweighs any perceived disadvantages and they are typically unavailable to sole proprietorships and general partnerships. They may include;
- Untouched assets
- Simple management structure
- Little or no restrictions
- Increased credibility
- Limited compliance requirements
8. Choose a Catchy Business Name
When starting a business, note that your business name grabs the attention of prospective customers. A lot of well renowned company names are creative, unique and catchy. They are unforgettable because they are most often invented.
They demand attention since they require the newcomer to learn its definition, usually by somehow interacting with the brand. Catchy names keep your audience curious and engaged. Things to consider when choosing a name may include;
- Know that your name makes money
A company name is, in a sense, a figure of speech. A name also has the invisible power of motivating your customers to buy and use your product or service. Also know that observing the way many successful companies have named their business, you can imitate their success.
- Think of a name’s talk-value
List and observe the possible names for your company and find relevant connotations. You need to discover and communicate its meaning because it will make the name more valuable to you and to your clients. We also believe that you should also consider its talk-value. Your company name is a vessel, traveling and spreading through your industry. Ensure that it sails smoothly.
- Verbalize Your Name
Whether or not we like it, brand names have become part of our lives, becoming verbs in our daily speech. A lot of companies want their names to be part of everyday speech, but many fall short because of their choice name. It is either unbrandable or it fails to gain the right attention.
9. Discuss With an Agent to Know the Best Insurance Policies for You
Even though this business is all about the welfare and life of your clients, you need insurance. At the very least you will need a business owner policy (BOP) and E&O insurance. A Business Owner Policy can be customized with a variety of different protections for everything from your equipment to the car you use for the business.
Note that E&O stands for errors and omissions and is sometimes called professional liability insurance. This insurance works in much the same way as medical malpractice insurance in that it protects you from mistakes you might make — that are the errors portion. Omissions are also mistakes you make, such as forgetting to advise a client that their policy is due for renewal.
Have it in mind that if you hire office or support staff, you may also have to carry worker’s compensation insurance depending on your state and the number of employees you hire. Also note that you will have to secure a surety bond. Note that a surety bond guarantees to pay one party, such as an insurance company, if you fail to meet your obligation.
10. Protect your Intellectual Property With Trademark, Copyrights, Patents
Professional service agencies— big and small—are often privy to highly confidential client information. From mergers and acquisitions, to new product or brand launches, agencies are almost entirely in-the-know. Have it in mind that with such knowledge of sensitive information that is not only kept from the public, but also sometimes unknown to company employees, agencies receive equal responsibility of risks associated with letting confidential information leak.
Also the financial and reputational ramifications of intellectual property loss can be very big, especially if it pertains to a product patent, financial transaction or secured trade secret. So to protect your agency from costly mishandling of confidential client information, you need to do the following;
- Legal contracts and non-disclosure agreements
- Hire team members who conduct themselves in a professional, loyal and discrete manner
- Ensure digital content, including trade secrets, via internet or internal server, are protected adequately. Ensure confidential content is given to agency employees on a need-to-know basis.
- Always consult a legal professional to ensure your bases are properly covered.
11. Get the Necessary Professional Certification
Professional certification can be another way to improve your skill set and be recognized for your accomplishments. In the world of professional branding and marketing, any advantage that helps in landing a client is worth the effort. You can get the following certifications;
- NAPEO Certification
- IRS Certification/SBEA
- Slavic401k Multiple Employer 401(k)
- Certificate of Authorization
12. Get the Necessary Legal Documents You Need to Operate
Certain state permits and licenses may be required to operate a Professional Employer Organization agency including a PEO business plan. We advise that you learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
But generally, you need to obtain a sellers license as most states require insurance agencies to remit sales tax for certain types of insurance products. A seller’s permit allows states to record and collect taxes from goods (and sometimes service) sales. Also note that some local licensing or regulatory requirements may apply.
- State by State Laws and Regulations
Laws pertaining to this business differ from state to state.
- Certificate of Occupancy
Indeed you can run this business from home. Businesses operating out of a physical location typically require a Certificate of Occupancy (CO). A C of O confirms that all building codes, zoning laws and government regulations have been met.
13. Raise the Needed Startup Capital
This business that takes care of people’s lives and income, needs specialized financing to support its growth. You need to understand that finance is the elixir that helps in the formation of new businesses, and allows businesses to take advantage of opportunities to grow, employ local workers and in turn support other businesses, and local, state and federal governments through the remittance of income taxes.
The strategic use of financial instruments such as loans and investments is the key to success of every business. You can get finance from;
- Personal savings
- Angel investor
- Venture Capital
- Loans and grants
- Alternative funding source like Crowdfunding
14. Choose a Suitable Location for your Business
Business location does matter, and generally speaking, your home is not a good one. You need a professional atmosphere in which to test applicants, interview likely candidates, train employees and hold the occasional business meeting.
Generally speaking, anything from a strip mall location, to a street-front location, to an office in an industrial park can work for a Professional Employer Organization service. As you scope out possible territory, you should consider all of the following:
- Client proximity
- Expansion possibilities
- Lease flexibility
15. Hire Employees for your Technical and Manpower Needs
The Professional Employer Organization industry has higher startup costs than a lot of other industries-for a couple of reasons. A home office isn’t usually a reasonable option. (You don’t really want all those people traipsing through your house, do you?) Also, you’ll have to meet payroll immediately, even though your business may have no income for a few months. Your start-up costs will depend greatly on the following factors:
Obviously, starting out with a small office and few permanent employees costs less than starting out with a larger facility and numerous permanent employees.
A lot of sectors of the industry are more expensive to operate in than are others. As a rule of thumb, the more highly skilled the job assignments your company handles, the higher your start-up costs will be. There are at least three reasons for this
- Employee salaries will be higher
- The need for a certain image may require a more expensive location
- Computer demands (both hardware and software) for testing and training will be greater. The most expensive niche in which to start up appears to be the medical staffing industry.
Office rent, employee pay, advertising costs, tax rates and insurance rates all depend on both your country and the city/town you reside in.
Start-up costs can range from $58,000 to $127,000, and you should have a suggested operating capital of between $80,000 and $135,000 in the bank. After having some success with initial placements and earning enough commissions, it is possible to expand staff to increase the placement activities.
Each new staff member can concentrate on expanding the opportunities in a particular industry sector or working with a certain type of professional. By using this strategy, it is possible to build up a good reputation from efforts that are focused on gaining useful expertise and contacts in a particular industry.
- Service Process
Note that in co-employment, the PEO becomes the employer of record for tax purposes, filing paperwork under its own tax identification numbers. The client company continues to direct the employees’ day-to-day activities. PEOs charge a service fee for taking over the human resources and payroll functions of the client company: typically, this is from 3 to 15% of total gross payroll.
We believe that this fee is in addition to the normal employee overhead costs, such as the employer’s share of FICA, Medicare, and unemployment insurance withholding. Note that this service provided by a PEO is to secure workers’ compensation and insurance coverage at a lower cost than client companies can obtain on an individual basis.
It is very crucial to note that a PEO obtains workers’ compensation coverage for its clients by negotiating insurance coverage that covers not just the PEO, but also the client companies. This is allowed because, legally, the PEO is the employer of the workers at the client companies. PEOs can also offer basic levels of background and drug screening.
Also note that using a PEO could potentially save the time and staff that would be used to prepare payroll and administer benefits plans, and may reduce legal liabilities or obligations to employees that it would otherwise have. Have it in mind that the client company may also be able to offer a better overall package of benefits, and thus attract more skilled employees.
The PEO model is therefore attractive to small and mid-sized businesses and associations, and PEO marketing is typically directed toward this segment. Several variations on the PEO model exist, differing in the nature of the relationship formed between PEO and Client Company.
- Administrative services organizations (ASO)
This business model is similar to PEOs, but do not create a co-employment relationship. Employees remain solely under the control of the client company. Tax and insurance filings are done by the ASO, but under the client company’s Employer Identification Number.
- Umbrella companies
Umbrella companies act as employer of record for independent contractors instead of permanent employees. We believe that the contractors become employees of the umbrella company, but do not also become employees of the client.
- Pass-through agencies
Pass-through agencies are staffing firms that act as the employer of record for independent contractors, but do not obtain work for them.
- Financial Intermediaries
Financial intermediaries also called fiscal intermediaries; act as an employer of record for home healthcare workers who serve disabled persons. Note that this streamlines the process of hiring such workers, because neither the household hiring them nor government units that provide funding need to take on the duties of an employer. PEOs can benefit companies differently. For example, a blue collar organization may see more value in workers’ compensation insurance and vice versa.
16. Write a Marketing Plan Packed With ideas & Strategies
We believe that a well thought-out marketing strategy is a very important tool for success in any business venture. Have it in mind that your prospective clients have a number of options to choose from. This is why is very important that your strategy represents your brand and helps you stand out from the competition.
Also we believe that a proper understanding of your target audience is key so that you will know how to let them know why they should come to you and how your agency can best fulfill their needs. Marketing your business requires networking with human resource managers of many companies.
It also involves lots of “cold-calling” of potential employees. Email marketing is possible if you build up a list of contacts. We believe that one way to meet the human resources managers of larger corporations and their staff is to attend employment trade shows.
Understand that going to business conferences in the industry sectors that you are interested in working with is another good way to make personal contacts with potential employers. It is important to build long-term relationships because both employers and employees may not have a current need, yet you will want them to call you if a need arises in the future.
17. Develop Iron-clad Competitive Strategies to Help You Win
We believe that businesses in this industry are in a very good position when it comes to marketing. This is because they have no tangible products to sell, but must instead rely on strong relationships with loyal customers and word of mouth to help them compete. Still, despite the challenges, the marketing strategies for your professional employer organization company are not different from any other company, and require a strong focus on the basics of effective marketing.
- Understand your market
- Have a plan
- Measure Effectiveness
- Gather feedback
- Initiate a competitive advantage
18. Brainstorm Possible Ways to Retain Clients & Customers
Customer attraction and retention is sometimes defined by the policy premium. A lot of clients react emotionally when they receive their renewal policy and realize the premium has gone up. We also believe that they fail to understand that increases are standard and are typically the same amongst all business.
This is why you should make sure your marketing strategy appeals to these clients at just the right moment (it really is all about timing when it comes to emotions) and they’ll come to you with a quote request. Immediately you have prospects in the door, you have an opportunity to start building that relationship. The best way to build a steady flow of business and keep previous clients coming back for more is to be very successful in making placements.
If both the employees and the employers are happy with the results of your work they will use your services again if another need arises. They can also help by spreading the word about your successful efforts to other professionals and organizations.
Your business will always mean a lot to your clients, be it the employers or employees, which is why you need to examine the client’s policies to determine if there are any aspects that could be amended or any discounts the client might be eligible for. Have it in mind that the relationship you have built with the client, coupled with your ongoing efforts to maintain a high level of service are often enough and will mean a lot to your business.
Note that in the business world, until you have built a strong book of business and proven your loyalty to the customer, they feel no real loyalty to you. Clients will be basing their decisions on price alone. But note that customer retention in this business is earned through strong customer service and anticipating the needs of your clients.
19. Develop Strategies to Boost Brand Awareness and Create a Corporate Identity
Brand awareness and cooperate identity are what boost your business and maximizes your income. This is why you need to consider every strategy available to you to mould your company name into something valuable and indestructible. Ways to do that for your personal employer organization business may include;
- Outsource departments that aren’t mission critical to the company’s core business. This includes accounting, marketing, and IT.
- Consider buying another ventures book of business
- Spend time keeping up with the latest in professional employer organization trends
- Allow your employees to work from home from time to time. This helps cut down on overhead expenses and sends a message to your staff that you trust them
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