Umbrella Company vs Limited Company
Identifying the difference between umbrella company and limited company might appear to be somewhat difficult without knowing about both types of companies. In fact, most of us might not even have heard of the terms. Particularly, the term Umbrella Company can be new to most of us. Therefore, a definition of both terms is necessary. A Limited Company and an Umbrella Company represent two companies that differ in their purpose. Indeed, the term Limited Company is a more generic term referring to a form of incorporation.
What is an Umbrella Company?
An Umbrella Company is not a term that is frequently heard. It is defined as a company that acts as an employer to contractors who work under a fixed term contract/assignment, ideally provided through a recruitment agency. This method is typically preferred by freelance contractors who take on short-term assignments or contracts. The Umbrella Company is the intermediary between such a freelancer or contractor and the client. Contractors enroll with an Umbrella Company because it provides flexibility and many other benefits. Firstly, contractors do not have to set up their own company in order to take on contracts and/or assignments. Therefore, it is an alternative to the stressful, cost-associated option of opening their own company. Secondly, the contractor is not required to perform any administrative tasks; particularly those tasks in relation to tax payments, payroll, and other expenses. Thus, the sole purpose of an Umbrella Company is to deal with all matters pertaining to the administration, accountancy, or taxation.
Contractors who enroll with an Umbrella Company automatically receive ‘employee’ status with such a company. The contractor is not a director or shareholder of the Company, but instead, is only required to complete an assignment or contract for a client. An Umbrella Company also works in close partnership with recruitment agencies. Recruitment agencies are organizations that engage clients and pass on the client’s orders to the Umbrella Company’s ‘employees’ (contractors). After the contract is completed, the client will pay the stipulated sum to the recruitment agency. The agency will in turn forward the payment to the Umbrella Company. After that, the contractor will receive his/her payment after the Umbrella Company has deducted its own fee as well as income tax contributions and insurance payments. Thus, the only task required of the contractor is to complete the contract and produce his/her time sheet to the Umbrella Company. Simply put, an Umbrella Company handles all the paperwork associated with a contractor’s job such as invoicing, taxation, collecting payments due, and forwarding payments to contractors.
What is a Limited Company?
As mentioned before, a Limited Company refers to a form of incorporation of a company. It is defined as a company in which the liability of the members of the company is limited (limited liability) to what they have invested in the company. A Limited Company may be limited by shares or guarantee. In law, a Limited Company is a legal personality meaning that it can sue and be sued, and has the right to own assets. A Company limited by shares is further divided into two categories, namely, private limited company and public limited company. Members of the Company, alluded to above, are more popularly known as shareholders mainly because they hold one or more shares in the Company. One of the main features of a Limited Company is that the liability of the shareholder is limited in relation to the Company’s debts. Thus, in the event the Company experiences financial difficulty or insolvency, the personal assets of the shareholder will not be secured to satisfy the debts of the Company.
A Limited Company is most often set up for business purposes, more specifically, to provide goods and/or services. It is spearheaded by a board of directors entrusted with the overall management and operation of the Company. Private Limited Companies refer to small or medium-scale businesses that do not sell their shares to the public. Public Limited Companies, on the other hand, are large, extensive businesses that sell their shares to the public, or rather invite the public to purchase shares in the company.
What is the difference between Umbrella Company and Limited Company?
Now, you may be clear with the Umbrella Company and Limited Company. Let’s take a look at the difference between both.
• Definition of Umbrella Company and Limited Company:
• An Umbrella Company is a company that manages the administration, taxation, and accountancy matters for independent contractors; these are its sole purpose.
• A Limited Company, in contrast, refers to a form of incorporation of a company. It is a company in which the members have limited liability to what they have invested in the company.
• Directors and Shareholders:
• Independent contractors typically enroll with an Umbrella Company and thereafter receive employee status. However, they are not directors or shareholders of the Company.
• Limited Company typically has directors and shareholders, and limits the liability of shareholders in the event the Company becomes insolvent.
• Functioning Method:
• The Umbrella Company facilitates the payment process for such independent contractors by forwarding payments from clients after the deduction of income tax contributions, insurance and the Umbrella Company’s fee.
• Limited Companies carry on different types of business activities.
• Company Status:
• An Umbrella Company may be a Limited Company depending on the nature of its incorporation.
• A Limited Company may be limited by shares or guarantee. Further, Companies limited by shares are categorized into public and private Limited Companies.
- Umbrella Company Flow Chart by Hamiltonbradbury.co.uk, via Wikimedia Commons
- Limited company by Dimples915 (CC BY-SA 3.0)