Updated September 7, 2021:

Umbrella Company Overview

Starting an umbrella company may be useful if you desire to own and control multiple businesses at once, for that is the purpose of an umbrella company. An umbrella company is so named because it acts as an over-arching structure to hold multiple lesser businesses beneath it, which are known as subsidiaries. Subsidiaries are companies that are at least majority-owned by another company, which may often be an umbrella company. Umbrella companies are just one of several ways to run multiple businesses, however.

How to Create an Umbrella Company?

Forming an umbrella company is a three-step process, the steps of which are as follows:

  1. Form a company that will function as the umbrella company by completing Articles of Incorporation and submitting them to your secretary of state or other state business registrar in the standard way.
  2. Select managers or a board of directors to run the company and create bylaws for the company’s operation. Then pass a resolution establishing the company as a holding company authorized to form subsidiary companies.
  3. Form a separate company in the standard way, except when creating the Articles of Incorporation, place a provision therein barring any changes to the management of the company without the umbrella company’s approval. Then select managers and create bylaws, also placing in these a provision barring changes to management. Last of all, place umbrella company assets into the subsidiary in exchange for all of the subsidiary’s stock.

After this, you will have successfully created an umbrella company and a subsidiary for it. You may then create or acquire more subsidiaries as needed. However, it should be noted that if your umbrella company is a C corporation, it cannot own an S corporation, in accordance with IRS rules.

Advantages of Umbrella Companies

There are a series of advantages in starting or partnering with umbrella companies. The bottom line is that umbrella companies provide a number of benefits for the recruitment agency and contractors as they provide guidance on human resources and reduce some administrative burden for both sides. In addition, umbrella companies also provide tax relief for the recruitment agency and clients. Using the Pay as You Earn (PAYE) method, employee payments, from client or contract fulfillment, and business expenses becomes easier. 

What is an Umbrella Employee?

Those who work through an umbrella company are referred to as an umbrella employee, which essentially means that the parent corporation will contract your services to the end client or agency as a contractor. Umbrella contractors get paid for their services by the umbrella company directly on a PAYE basis after deductions are made for tax and National Insurance contributions. This job comes with benefits as data shows that the average holiday pay is 12.07% of the hourly rate but this might vary depending on the parent company and home state. 

The Difference beween Umbrella Companies vs. Other Multiple-Business Structures

An umbrella company is not the only way that one may run multiple businesses at once, although it may be preferred for companies that wish to spin off parts of themselves into lesser businesses. Other options aside from the umbrella company include creating multiple LLCs or corporations and operating them separately or creating one business and operating it under multiple different names.

Multiple LLCs or Corporations

The first option, creating multiple LLCs or corporations, is possible because there is no limit to how many LLCs or corporations one can form. Thus you can simply create a new business venture whenever the need occurs. The advantage of this method is that it reduces the risk that each individual business has from the other. If one business gets sued, has a slump, or even goes under, it will not negatively affect the other businesses. Even-though both structures provide legal protection for all their shareholders, the disadvantage is that there is much more administrative work insofar as paperwork and maintenance fees are concerned. This may include:

  • Paying to form each individual business.
  • Paying annual fees for some businesses.
  • Paying licensing fees for some businesses.
  • Getting separate employer identification numbers (EINS) for each business.
  • Filing separate taxes for each business.

Doing Business As (DBA)

The second option is to create one business and then establish separate "doing business as" (DBA) enterprises for each business venture. To the general public, you can then run each business as a separate enterprise, using the DBA name you have established for both advertising and the writing and acceptance of checks.

The advantage of the DBA approach is that you can save a great deal on maintenance and fees, as you only have to establish your business, file fees, acquire an EIN, and file taxes for one entity. When filing taxes, you will take the income from all the DBAs and file it as the income of the main company. Additionally, as far as legal issues are concerned, each of your DBAs will benefit from the same legal protections that the main company has. The downside of this, and of running a DBA structure in general, is that each DBA is not protected from the others. If one is sued, then all other DBAs will be liable, as well.

To contrast against the disadvantages of multiple separate businesses and a collection of DBAs, an umbrella company will not have to deal with the administrative issues of its subsidiaries and will generally afford more legal protection for each subsidiary from the other. That said, what the best practice to put into place will vary from business to business.

If you need help understanding the process of starting an umbrella company, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.