Limited vs. Umbrella: what’s better?

Limited Company vs Umbrella Comapny

Umbrella Comapny vs Limited Company

As a contractor, when you are setting a payment structure for your business, you basically have two options: a limited company or an umbrella company.  So, which is better?  What should you do?

Basics of a limited company

With a limited company structure, the following will apply:

  • The contractor (you) will be the director of the company and in full control of its transactions.
  • You will be responsible for compliance with any and all laws, regulations, and guidelines set forth by the government.  You are also responsible for the payment of taxes, payroll calculations, and other statutory requirements.
  • You will be handling all the accounting systems and recording transactions for your accountant.

Advantages and disadvantages of a limited company

There are advantages to the limited company structure.  Some of them include:

  • You have complete control of all company matters and transactions.
  • You will have your own trading name and won’t have to deal with anyone else.
  • You have full control of the revenue.
  • There is faster payment and a quicker administration process.
  • You have a smaller tax burden.

Despite the advantages, there are some disadvantages to the limited company structure, including:

  • There is a lot of paperwork involved.  What happens if you get busy and file late?  There are penalties.
  • You are responsible for the day-to-day issues involving invoicing and accounting.  This can get complicated and is time-consuming.

Basics of an umbrella company

With an umbrella company structure, the following will apply:

  • You won’t be the director nor will you be responsible for running the company directly.
  • The umbrella company will deal with all accounting and tax issues, including payroll.  The company will also deal with all administration issues.
  • You will complete a timesheet or contract and provide it to the umbrella company, who will then distribute any invoices to agents and clients.
  • The umbrella company will receive all payments and forward them along to you.

Advantages and disadvantages of an umbrella company

Just as the limited company structure has its perks, so does the umbrella company structure.  These include:

  • After a simple set up, you won’t have to deal with actually running the company.
  • You don’t have to worry about bank account issues, taxes, or payroll matters – they are all handled for you.
  • There is no costly process of forming the company and then dissolving it.
  • Umbrella companies are easy to use.

Though an umbrella company may seem like a great idea, there are some disadvantages to this structure as well:

  • By definition, you won’t be running your company; the umbrella company will do that.
  • You can’t represent yourself as running your own business – you can’t take risks, set policies, or act as a director.
  • There will be a delay in receiving payment for services rendered.
  • You lose any tax benefits of being a small business.

In most cases, the decision as to whether you will opt for a limited company or an umbrella company is entirely up to you.  If you plan on having a short-term endeavor, you may choose the umbrella company, as there will be less work involved for you.  However, remember to weigh all your options and seek the advice of a professional if you need it.

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