When thinking of structuring a business, you have a few options available. Umbrella and limited companies are two of the most popular of them. While they both have their pros and cons, you must determine which one is best suitable for your needs, not only in terms of growth and success but also favors you in your finances and tax affairs. So let’s understand both of them in detail.
What is an umbrella company?
An umbrella company is an employer and usually employs short-term contractors for its clients. These types of structures can be seen in construction companies and IT companies where the candidate is hired for his skills to deliver a certain job to the end client. For example, freelance content writers, graphic designers, bricklayers, and roofers.
Umbrella companies invoice the client on behalf of the contractors and pay them on fixed periods. In most cases, umbrellas provide insurance, paid leaves, and other perks to their employees while deducting the tax upfront and charging a fixed fee or percent cut from the contractor.
Advantages and disadvantages of an umbrella company
- Easy for an individual to get started with it.
- A better option for short-term contracts
- Takes care of the admin work on behalf of the employee
- Doesn’t require a separate business bank account.
- A hassle-free way to work with clients.
Disadvantages:
- Less tax-efficient in comparison to a limited company
- Sometimes an employee may feel less control over the process.
- Employees must pay a fee to use the services of an umbrella company.
- You work as an employee even after working as a contractor or self-employed.
What is a limited company?
A limited company is an independent legal entity registered with Companies Houses. Having a limited company means the shareholders and owner of the company are not personally liable for any debts and losses in the business.
This means in case of financial loss or debt default, the lender may seize the company assets but can not touch the personal assets and bank accounts.
However, a limited company comes with certain responsibilities, such as filing income tax returns, National Insurance contributions, etc.
Advantages and disadvantages of a limited company
Advantages:
- The biggest benefit of having a limited company is the limited liability on the owner, ensuring that their personal assets won’t be touched in case of financial difficulties.
- Owners have full control over their company structure.
- Shows professionalism in front of clients.
- You can plan your taxes.
Disadvantages:
- It may be overwhelming for short-term contractors to run a limited company
- Lots of admin work. You may even require an accountant
- Owners and stakeholders are required to fill out the self-assessment return.
- Going through all the legal documents can be time-consuming.
Which one is the best route for you?
Now you know the difference between an umbrella and a limited company and their advantages and disadvantages. You must be wondering, which is the best route for me? Let’s see which one is for you:
When should you go for an umbrella company?
If you are working on a short-term contract or are unsure about working long-term, you can go with an umbrella company. You’ll get paid by your employer (umbrella), a hassle-free option where you don’t have to worry about different administration works.
Your employer will timely invoice the end client and pay you at the decided time. This could be daily, weekly, monthly, or even quarterly. Before working with an umbrella company, ensure you’ve read their terms and conditions. Knowing what perks they provide, how they will charge for their services, and what taxes they will deduct before paying you is essential.
While working with an umbrella, you may need to submit a timesheet, but that’s okay for the service and perks you get in return. It’s better than running a company and managing each task independently.
When should you go for a limited company?
If you make more money than an average salaried person in your industry and want to save on taxes even at the cost of doing a few more tasks yourself, go for a limited company. The structure of a limited company is the most tax-efficient for most businesses.
In a limited company, business owners and stakeholders can pay themselves in the form of salary (usually lower) and dividends to get benefit from different tax-free allowances applied on each method, make pension contributions which are tax-free, or even keep the money in the business to use or extract in the future.
However, you might need to hire a part-time or full-time accountant due to a higher administrative burden.
Final thoughts
Every individual has different goals depending upon the size of the project they are working on or the type of business they are into. For example, suppose you want to work with zero distraction and without worrying about the legal and paperwork. In that case, an umbrella is the right choice, but if your goal is to get the maximum tax benefits and have everything in your control, go with a limited company.
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