PEO For Sole Proprietors: Does It Pencil?

On the surface, it would be easy to decide that your one-man or one-woman band wouldn’t benefit from partnering with a PEO.  But, that most often is not the case.  In fact, there are some very compelling reasons why you should investigate a PEO for yourself.

Let’s start with what a PEO is and what it does, then we’ll circle around to what a PEO can do for you.

Professional Employer Organizations (PEOs) were created to give small employers (including you) the ability to legally use the combined buying power of their joint efforts to secure healthcare and other services at a price that was comparable to what the big dogs could get.

This was no small feat, since it’s illegal for companies to create a cooperative effort to buy health insurance for their employees.  But, in the 1970s, a few enterprising companies figured out how to make it happen and the PEO industry was born.

PEOs work because they “co-employ,” you.  In the case of a larger business, they would become the employer of record for all employees.  Because of this shift in the employer of record, PEOs are able to pool together hundreds, if not thousands of companies and negotiate rates as if they were a Fortune 500 company.

Included in the typical PEOs services are Human Resource management, Worker’s Compensation insurance, healthcare benefits and liability/risk assessment and protections.  Because of the buying power of the PEO, the administrative costs associated with working with them are washed, if not better, in the healthcare savings alone.

So, as a sole proprietor, you no longer have to settle for very limited healthcare selection and high premiums.  Your work machine will be joined by thousands of others and you will most likely end up with better choices and lower premiums.  This can create a notable win for your checkbook.

As a really small business, you are excluded from most of the largest health insurance providers.  Growing, but still small, businesses don’t have it much better.  In the last year, New York State screwed employers with 51 to 100 employees by forcing them into the pool with smaller employers.  This reduced their choices and will increase their premiums notably.

But, working with a PEO takes the size of your company out of the equation.  As a simple example, who do you suppose has more purchasing power, you as a single sole proprietor or the combined power of ten thousand sole proprietors and other small businesses that have banded together under a PEO?

The answer is pretty obvious.  But, how time consuming is it to source a PEO for your sole proprietorship?

It doesn’t take a bazillion hours to find the right PEO for you, either.  You can choose to work with an independent broker will do your legwork for you.  They already know the industry, so once they understand your business, they’ll go to work and build a short list of PEOs that you should consider.

A good broker will avoid PEOs that charge their administration fee as a percentage of gross payroll, too.  They’ll focus on a few providers that have simple and transparent pricing.  You’ll also have the ability to schedule a demonstration of their online portal, the tool you’ll use to manage, well… you.

For some sole proprietors, the only notable shift in operations might be moving yourself onto a regular payroll.  Different corporate structures can affect how this happens, as can the state where you operate, so you’ll be best served with a quick conversation with your CPA to confirm the best transition for you.

For fun, you’ll now be able to complain when, “paychecks are late again,” even as you know that you’re supposed to confirm the paycheck release in your PEO account portal.

There are other reasons that you might want to consider a PEO as a sole proprietor.  One big one is worker’s compensation insurance.

Let’s say that you are a one person automotive repair shop.  One day, you drop a car battery on your foot.  The pain of the injury is nothing compared to the realization that you won’t be able to work for several weeks.  Your healthcare bills will largely be covered, albeit with a large co-pay, but who’s going to pay your electric bill while you are healing?

Since you were smart enough to partner with a PEO, the answer is the same as it would be if you were someone’s employee and you dropped that battery on your foot.  The insurance company will pay a percentage of your regular wages, until you are back to work and able to earn again.

Now what’s that PEO worth to you? 

But, you can take benefits like this one step further, if you plan to grow beyond just you.  One of the top three reasons that candidates choose a particular employer is benefits.  Your PEO will be ready when you want to add employees, offering them great and affordable choices for their health benefits.

The PEO will also, through your account team, provide you with recruiting and onboarding help, required documentation, policies and signage, all without a major disruption to your business at a time when it can least afford it- GROW time.

If you continue growing, the value of the PEO also grows.  Companies who partner with a PEO spend virtually no time on HR-related tasks, because the PEO is handling them.  If you have an employee that wants to request personal time off (PTO), they don’t show up at your office door, they instead log into the PEOs employee portal and choose their PTO dates, in line with the policies and practices that you have developed.

In the long run, though, even if you make the decision to continue indefinitely as a sole proprietor, you’ll most likely benefit from a PEO partnership.  You’ll be able to spend revenues that were going to high healthcare premiums on other business needs, while also having a much larger choice of healthcare plans and prices.