Six Reasons Why Startups Use PEOs

A professional employer organization (PEO) is a natural fit for startups. They can offer access to enterprise-grade HR services. This is beneficial for organizations with limited time, money, and expertise.

Startups working with a PEO delegate employee management functions. These include payroll, benefits, retirement programs, and insurance. While the startups retain control over their workforce.

PEOs have many clients, allowing them to offer premium services at economy-of-scale pricing. Even small organizations benefit from this cost-effective option. As a result, startups can leverage PEOs for the following advantages.

1: To gain time

A PEO can offer a significant benefit by cutting down on costly and unproductive administrative time. It takes care of the functions mentioned above, saving you valuable resources. A PEO can get employers out of the employer business. It allows workers to focus on building their business offerings.

According to management consultant Peter Drucker, PEOs free up managers from employment-related rules, regulations, and paperwork. Managers and owners are able to focus on the business and its growth.

2: To reduce the cost of HR

Failing to implement any sort of formal HR program is a grave risk. It can lead to business failure. However, cash-strapped startups may struggle to find alternatives. Thankfully, outsourcing HR can significantly reduce HR administrative costs.

According to Congresswoman Erin Houchin (Ind.-09), a PEO is highly beneficial for growing small to mid-sized businesses. She is the only person elected to Congress who has worked for a PEO. “It can help a small business reduce costs, especially with healthcare by taking advantage of large group pricing.” The result of these cost savings can be significant, with PEO users realizing 27.2% ROI on average in cost savings alone.

3: Reduce owner's liabilities and responsibilities

In most states, once the startup starts working with a PEO, its own tax ID number becomes inactive. The client actually assumes the payroll tax ID number of the PEO. This lawfully reduces many liabilities for the client company, none bigger than payroll taxes. The PEO is responsible for collecting and remitting taxes based on wages reported by the client.

4: Leverage economies of scale

Professional employer organizations make enterprise-grade services and benefits available even to small businesses. Successful PEOs service thousands or tens of thousands of worksite employees across their clients. That gives them enormous leverage to negotiate competitive rates with insurers and other benefit providers. This allows cash-strapped startups to offer top-notch health insurance, 401k plans, and attractive benefits.

5: To boost revenue

While a PEO won't directly increase revenue, many startup founders misjudge the opportunity cost of a DIY approach to HR. They can help startups free time for business-building and growth, while also lowering employee-related costs on average. Professional employer organizations can help startups generate more revenue than if the business tried a DIY approach.

NAPEO conducted an analysis of revenue growth and profitability at companies using PEOs compared to those that do not. The results showed that PEO users experienced double the average median revenue growth and 16% higher profitability increases year-over-year.

6: To stay in business

Startups can fail for many reasons, and a lack of sales is only one. As mentioned above, HR issues can put organizations out of business just as surely. Professional employer organizations can help startups to reduce costs while simultaneously covering their HR bases.

This can be particularly impactful during crisis events and major disruptions, as the Covid-19 pandemic shows. After the pandemic, NAPEO conducted an analysis and revealed some significant findings. PEO clients were 58% less likely to have permanently closed compared to non-PEO users. Additionally, PEO clients were 82% more likely to have their business operations return to normal or even improve.

CoAdvantage, one of the nation’s largest Professional Employer Organizations, helps small to mid-sized companies with HR administration, benefits, payroll, and compliance. To learn more about our ability to create a strategic HR function in your business that drives business growth potential, contact us today.