An umbrella company is sometimes used by professionals who work in other countries in conjunction with other parties. They solve many legal complications such as how to tax a person who is not a direct employee of a foreign client or a recruitment agency.
This guide will detail the following:
- What is an Umbrella Company?
- How do Umbrella Companies work?
- What are the benefits of an Umbrella Company?
- What are the problems with starting a business abroad?
- How an umbrella company working abroad can help?
Umbrella Company Definition
An umbrella company employs professionals who perform work on temporary contracts, usually through a recruitment agency. Recruitment agencies typically prefer to issue contracts to limited companies because their liability is reduced.
The umbrella company is responsible for tax compliance and processing payroll.
How Does an Umbrella Firm Work?
The specific umbrella structure will be based on the contracts between the relevant parties. However, the process may generally follow the outline below;
- The umbrella acts as the employer of record for employees you later seek to engage.
- The umbrella enters into a business-to-business (B2B) relationship with the recruitment agency.
- The professional signs a contract of employment directly with the umbrella company.
- The professional works for foreign businesses.
- A manager who is authorized to do so monitors daily activity on the job site and signs the professional’s timesheet. The manager signs the timesheet to confirm the days and hours worked. The timesheet may also include expenses the professional incurred.
- The professional submits the timesheet to the recruitment agency and the umbrella.
- The umbrella firm prepares an invoice for the professional’s payment to the recruitment agency for the hours worked and any reimbursable expenses.
- The recruitment agency bills the end-client.
- End-client pays a recruitment agency.
- The recruitment agency remits payment to the umbrella firm.
- The umbrella company processes payroll and makes the proper allocations for the professional’s salary and reimbursable expenses, deductions for taxes, agreed-upon deductions, and the agreed-upon umbrella fee.
- The process continues for the next pay period.
Umbrella Companies Structure
An umbrella organization bridges relationships between the client, recruitment agency, professional and the umbrella company.
Umbrella companies employ professionals through the use of contracts of employment. These contracts specify the requirements of each party. Typically, the umbrella company is tasked with the responsibility of issuing invoices for the contractor’s work.
Because of the use of umbrella organizations, the other companies and the contractor can retain their current entity status without having to establish a foreign entity. Because the contractor is not paying their own tax, they do not have to set up their own company.
The umbrella is responsible for paying the professional, but the professional is required to submit his or her timesheet also to the recruitment agency. After receiving payment from the recruitment agency, the umbrella firm processes payroll, handling all compliance requirements and processing deductions. The umbrella pays the professional.
Some umbrella companies are structured in a way that professionals establish their own entity like a limited company. This usually translates into a lower declared salary with various expenses that may be used to reduce taxable income. Any legitimate business expenses the professional incurs can potentially be claimed.
Umbrella Company Services
The services an umbrella offers will be spelled out in its contract with the professional and its business to business contracts with the recruitment agency.
However, umbrella firms often provide invoicing services and handle tax, contributions, and deductions. This is their primary function. The umbrella company provides a payroll service to its employees, processes timesheets and invoices, processes payroll and pays employees their wages and any reimbursable expenses.
Some umbrella companies act as a billing agent between the client and the recruitment agency. Because the professional is the employee of the umbrella organization, the professional is usually entitled to the same benefits as other employees, such as sick pay, holiday pay and severance pay.
The umbrella company is responsible for administering these benefits.
Benefits of Umbrella Companies
Working with an umbrella company can provide many benefits to foreign businesses.
The umbrella company is the direct employer of record of the contractor, so the foreign company does not have to worry about compliance matters like immigration or tax laws.
The umbrella firm handles the payment to the contractor and can arrange to pay in a currency that works for the foreign business while the umbrella organization pays in the local currency.
This option appeals to contractors because they can claim work-related expenses free of tax, so using an umbrella company can help the foreign business attract more talent.
The process is often very straight-forward with the contractor only needing to submit their timesheet and other required documentation to the umbrella company, which then pays the contractor. This streamlines the administrative process and reduces costs.
Problems with Starting a Business
Many companies struggle when they try to open a business abroad. Some of the common issues they report include:
- It is expensive to come up with the required capital investment
- Language barriers confuse them
- The immigration process is confusing
- Dealing with the various bureaucracies is frustrating
- Foreign companies can’t hire local employees
An umbrella company can help solve some of these problems.
The business may not need to establish a separate legal entity if the only purpose is to legally hire employees in the country. The umbrella company can handle this responsibility.
However, many companies need more than just an umbrella firm to successfully launch into a new market. New Horizon’s PEO services provide comprehensive administrative and HR support that equip businesses with a strong partnership that can help them lay the groundwork for emerging into the Chinese market.
How to Find an Umbrella Company
While there are many businesses that may advertise providing umbrella company services, it is important to select an umbrella organization that is established and recognized in the local market.
Some umbrella organizations may leverage their relationships and recommend using their partner suppliers. It is important to conduct research into your options before entering into a contract with an umbrella company.
When meeting with umbrella companies with whom you would potentially like to do business, you should ask the following questions:
- What is your schedule of charges
You should have a firm understanding of how the umbrella charges for its services. This may be a gross fee per week or month or a percentage. Be familiar with additional fees, such as fees to join or leave the company.
- What is your company’s background?
You should learn as much background information about the company as possible. You should know how long it has been in business, what industries it serves, how many professionals it has and how many companies it does business with.
- How are contractor payments made?
You should know how professional payments are transferred and the payment schedule. Also, be familiar with any extra service charges, such as same-day transfer charges. You should also be aware of the technology that is used to handle payments and timesheets and how this information is secured.
- How do you ensure compliance?
You may be concerned about how you can ensure the umbrella company is compliant with local labor organizations and tax agencies. You may want to ask for copies of professional compliance audits.
- Will you have an account manager?
The best umbrella companies will assign a specific account manager to handle each account.
Find Out More About Umbrella Companies
If you would like more information about umbrella companies or other solutions to make Global Expansion in a more cost-efficient manner, you can contact NH Global Partners.
We focus on providing business solutions to companies that do not have existing legal entities in Asia or that require additional office support.
Our service offerings allow foreign businesses to reduce administrative costs, simplify and centralize payments and delegate compliance matters and regulatory matters to a local company with existing relationships with governmental agencies.
Contact us to learn how we can help your business emerge into the promising Asian market.