Invert the Employee/Employer relationship start an Umbrella Company

http://stakeventures.com/articles/2008/09/24/great-business-idea-1-umbrella-companies

by pelle • 18 years ago

8 10 18 years ago

That's an interesting concept. I wonder what legal issues would need to be tacked with regards to the notion of whether you are a "business" or an "employee" to make that work in the North American market?

I wonder though, do the individual contractors market themselves as being from that company? What does that do for the reputation of the umbrella corp? Anyone have any details?

pelle2• 18 years ago

In the UK it's pretty transparent. The only time the client sees the company name is on the invoice. Most people using umbrella companies go through agencies, but you could obviously do your own selling.

zach• 18 years ago

We have PEOs here in North America:

http://en.wikipedia.org/wiki/Professional_employer_organizat...

I worked for Administaff, a huge PEO, when I was at a startup video game company. They are your employer-in-name on behalf of your employer-in-fact. So all your payroll, benefits, etc. come from them. It enabled us to not have an HR person (or any other non-development personnel) in the company until we were acquired, which is a particular benefit in a small, product-focused company.

run4yourlives3• 18 years ago

That's a little different though in that the PEO works for your "real" employer, whereas the Umbrella works for you, the employee.

nazgulnarsil• 18 years ago

this is interesting. basically offering the accounting department of a company as a package deal?

I can definitely see something like this working in a tech dense area.

tptacek• 18 years ago

I'm not sure I see the difference between an "umbrella company" and every private consulting company in the US.

* I assume the difference is, the "employee" in the umbrella scenario has to do their own sales and marketing? If so, how does some other company pay them a salary? They don't know what the revenue from the consultant is going to be.

* If the umbrella just provides invoicing, you can already outsource invoicing without changing your employment status.

* In the US, your "employer" is responsible for a portion of your payroll taxes, which adds financial risk and overhead.

* If you do the kind of high-end work most HN readers do, the major corp-to-corp relationship problem can't be outsourced --- the negotiation of a master services agreement. Are you working on some F-500 company's own paper? You're a sucker.

* If you're a contractor that plans to continue contracting, this isn't necessarilly a win: you've outsourced the corp-to-corp stuff to someone else, who now owns the paper for the deal and thus a chunk of the relationship. How do you resolve channel conflicts?

pelle2• 18 years ago

The real difference is that it allows you to cut all the paperwork out of your life. There are many people who want the perceived safety of W2 and/or don't want the hassle of running their own business. Umbrella Companies make it very easy to do so.

The umbrella company basically deducts payroll taxes, benefits expenses and any other benefits and pays the employee.

For the majority of contractors this model would be easier. However granted it's not for everyone, and it isn't supposed to be either.

An interesting side effect of having one or two good umbrella companies, could be that people who don't normally contract might start preferring working through them.

These wouldn't necessarily have to work on regular hourly contracts either, but could do monthly fixed invoices that would map to a regular salary.

SF for example has lots of people who move from one job to the other several times a year. Why not take control of your own benefits program.

As an entrepreneur myself I would probably prefer working with employees through something like this than having to deal with it myself. Paying an invoice is a hell of a lot simpler than having an employee.

There are other unexplored issues. How do you deal with stock options and vesting for example. I'm not too familiar with the legalities of that.

run4yourlives3• 18 years ago

The big one was the "benefits". If the Umbrella corp offers, say a brand new laptop as an employee benefit, which they lease for you and simply deduct from the total amount paid by the customer, and not from your salary, you can essentially obtain a laptop by paying for it with pretax dollars. You could basically extend this to everything... cars, first class airfare, hotels, superbowl tickets etc.

Theoretically, you could do all of this as a contractor too, but you pay the umbrella corp for the hassle of balancing the books for you, while you collect a salary and pay income tax instead.

In Canada, where contractors are responsible for charging GST and remitting it to the government, and employees aren't, these types of companies could save a lot of hassle.

denglish• 18 years ago

This is a pretty common practise here in Australia as well. I've been contracting through an umbrella company - certainly takes the headaches out of paperwork. Don't quite know how they manage it but usually their fee is added on top of my negotiated daily rate rather than taken out of my rate. Works for me :)

RobGR• 17 years ago

If this were done in the US, the umbrella company could offer a 401k, which many freelancers would like. (I know you can do it even as a freelancer, but it's a hassle.)

Edit: There might be at least one place that does this: http://www.mbopartners.com/Individuals/groupbenefits.html

Invert the Employee/Employer relationship start an Umbrella Company

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