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The ultimate guide to umbrella companies: Its nature, benefits, and components

Business expansion takes a significant toll on any company, especially if the trajectory of the extension is to international waters. There are a lot of logistical needs to be conducted and physically demanding legalities that must comply. 

From securing business permits to arranging tax payments and building the physical company, all of these require business owners to be physically present.

With the challenging legal requirements involved, specifically in employment, temporary immediate solutions are needed. 

This is where umbrella companies come in handy. 

Umbrella companies allow businesses to conduct operations internationally by temporarily employing them on behalf of the company. Here is a guide that will elucidate its nature and how it works.   

What is an umbrella company?

An umbrella company is a business that provides a legal structure for the client to operate their small business.

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Umbrella companies usually handle all the payroll, benefits, and legal requirements on behalf of the client company. These are relatively new recruitment arrangement that is popular in the United Kingdom and Europe. 

Due to the peculiar hiring practices in the UK through the recently passed IR35, this kind of arrangement has been on the rise. 

Under this sourcing solution, temporary workers are contracted by umbrella companies working for a client company. This arrangement benefits the client company as they do not need to set up and comply with the complicated legislative processes. 

Included in the responsibilities of umbrella companies is the processing of withholding payroll taxes, pension contributions, and government-mandated benefits

What is an umbrella company

Who comprises an umbrella company? 

An umbrella company is a legal company that functions on its own. However, its relationship with different parties makes the arrangement more nuanced. 

To fully understand, below are the different types of arrangements in an umbrella company:

Client companies

These are the businesses or enterprises that need to operate in the UK or Europe and require local or international staff. 

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Client companies can be construction companies, multinationals, or any company requiring staffing solutions to be contracted on their behalf. 

Recruitment agencies 

These companies select and screen the contracted workers on behalf of the client company. They coordinate with the client company for the required standards and quantity. 

Once the selection is made, it directs the employees to the umbrella company for hiring and processing company benefits. 

Who comprises an umbrella company

Contracted staff

These are temporary, remote, or office-based staff that the client company hires for the completion of its operations. 

How does an umbrella company work? 

Umbrella companies assume their structure based on the agreed-upon arrangement between parties which generally take this route:

  1. Umbrella company enters into a business–to–business partnership with recruitment agencies. 
  2. Recruitment agencies look for interested client companies from all over the world.
  3. Contracted staff enter into an agreement with the umbrella company, making them direct hires and entitled to all the benefits the government bestows.   
  4. Employees perform their tasks for the client company at any time of the day. This includes an appointed manager that monitors the progress of the tasks. 
  5. The manager is responsible for all the on-site documentation, which includes a timesheet of staff.
  6. The signed timesheet is submitted to the umbrella company and recruitment agency for processing. 
  7. The umbrella company releases an invoice to the recruitment agency and pays all the rendered services of the contracted employees. 
  8. Once the recruitment agency receives the invoice, it will bill the client company for all the services rendered along with reimbursable expenses. 
  9. Once payment has been made to the recruitment agency, it will remit the payment dues to the umbrella company and the latter will release all of the payables and make the necessary government-mandated deductions.

This cycle continues from one payroll to the next until the contract from the client company ceases. 

Advantages of an umbrella company

As shown in the process and relationship detailed in the previous section, this arrangement offers various benefits across the different parties involved. Some of the benefits include:

Ease in compliance

Umbrella companies avoid the risk of back-pay taxes, compulsory contributions, and other legal penalties that may be incurred if operating locally. This saves the company from a lot of legislative tasks as the umbrella company handles on their behalf. 

It allows the company to just focus on performing the job and getting actual results rather than troubleshooting these bottlenecks. 

Advantages of an umbrella company

No subsidiary required

One of the major predicaments of business expansion is the creation of a legal entity or subsidiary. This entails a lot of work and physical presence. 

Umbrella companies eliminate all of these as they are locals who have been in the country for so long. They understand the local culture, which helps in the fast resolution of issues.

Convenience for workers

Contracted staff is usually freelancers in the market looking for various employment opportunities. This arrangement requires them to process their own tax returns and file legal requirements mandated by the law. 

Their arrangement with umbrella companies eliminates this need. They can focus on their task and do freelance work on the side without legal issues. 

Why engage in umbrella companies?

Business expansion is challenging. Legalities aside, the culture of the country where the business will operate can be quite tricky for foreign businesses. It needs local eyes and an understanding of the nuances for the company to operate effectively. 

Umbrella companies solve all of these complexities allowing international companies to operate at ease in the UK and other European countries. It can be confusing at first, but the arrangement works fine in these countries.

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About Derek Gallimore

Derek Gallimore has been in business for 20 years, outsourcing for over eight years, and has been living in Manila (the heart of global outsourcing) since 2014. Derek is the founder and CEO of Outsource Accelerator, and is regarded as a leading expert on all things outsourcing.