Are you a freelancer or a contractor?
If you are, you may have heard of an umbrella company.
While it offers many benefits to professionals working on a contract or as a freelancer, you may still get confused about whether it’s the right choice.
And like any other business decision, you must look at both sides; pros and cons.
Because on the one hand, it can offer perks like access to employee benefits, less paperwork, and protection against legal and financial risks. On the other hand, it may come with additional costs and less control over your finances.
But don’t worry, in this article, we’ll explore the advantages and disadvantages of working with an umbrella company so that you can make an informed decision for your career.
What is an umbrella company?
Before diving deep into the pros and cons, let’s briefly understand an umbrella company.
An umbrella company is a third-party organization that acts as an employer for contractors. That means you would technically be an employee of the umbrella company and not a self-employed individual.
If you work with an umbrella company, they handle the administrative tasks, such as invoicing, payroll, taxes, etc., on your behalf. Some umbrella companies also provide added benefits such as paid leaves, insurance, etc. And for all these services, they charge a fee from you. This fee could be a flat rate or a percentage of the earnings.
Since you understand what an umbrella company is, let’s know their pros and cons:
Pros of working with an umbrella company:
- Access to employee benefits
One of the major advantages of working with an umbrella company is access to employee benefits. While working as a self-employed individual, you don’t have the luxury of getting paid leaves or perks such as insurance or pension schemes. On the other hand, working with an umbrella company makes you an employee of that company; hence you get employee benefits.
This can benefit you, especially when working with a client on a long-term contract. You don’t have to negotiate these perks as your employer (umbrella company) manages that for you.
This can also be a selling point to your client when negotiating for a project that you’re a professional who takes care of your own affairs.
- Reduced administrative tasks
A self-employed professional is responsible for invoicing clients, filing taxes, keeping track of expenses, and other administrative tasks that consume a lot of time. An umbrella company reduces all those tasks and makes your job easy so that you can focus on the tasks that matter to you the most.
Administrative tasks can be stressful and eat up your time. This costs you money as you’re not working on your actual project at that time. Umbrella company handles all the paperwork and other administrative work to give you more time to work on tasks that make money.
- Protection from legal and financial risks
Working as a contractor or self-employed individual comes with its own set of legal and financial risks. For example, if a client fails to pay, you have to pursue legal action to recover the amount. Similarly, you may face penalties and fines if you make any errors in filing your taxes.
You can reduce all these risks by working with an umbrella company, as they will handle these matters on your behalf, ensuring you are not exposed to such risks. This gives you peace of mind and allows you to focus on your work without worrying about legal or financial issues.
Cons of working with an umbrella company:
- Additional costs
Umbrella companies charge you a fee for managing the administrative and legal stuff on your behalf. This additional cost could be a disadvantage for some professionals. Especially if a contractor’s earnings are small, this can eat all the profits and reduce the overall income.
Some umbrella companies also charge extra fees for added services such as processing expenses or setting up a pension scheme. That’s why you must carefully review the fee structure of any umbrella company before starting to work with them.
- Less control over your finances
When working with an umbrella company, you work as an employee. And you get your money on set periods. The company decides this payment period and could be weekly or monthly. This can be frustrating for individuals who are used to having full control over their finances as soon as clients clear the invoices.
Conclusion
An umbrella company is a good option for self-employed individuals who work on contracts. However, one must know the pros and cons of it.
If you’re considering working with an umbrella company, we suggest you thoroughly review their terms and conditions and ensure that the payment terms align with your needs and expectations.
