How to start an umbrella company

Written by tami parrington
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An umbrella company bills clients, keeps track of income and expenses, and in some cases even withholds taxes from payments. In effect, the umbrella company becomes the employer and the freelancer/independent contractor becomes an employee inside his own business. Primarily a European concept, the field of umbrella companies is still wide open as a business opportunity in the U.S. Setting up an umbrella company is a big responsibility, but in an era of work-at-home computer commuting, it has a lot of potential, too.

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    Apply for the appropriate business licenses in your city, county and/or state. Check with zoning offices if you wish to conduct your business from your home, in case there are issues with operating a business from your location. Typically an umbrella company is a work-at-home business without incoming clients or traffic, and most areas do not restrict that type of business from operating. However, some areas require the type of business you operate to have a license.

  2. 2

    Apply for an EIN number from the IRS. An EIN is an Employer identification Number and allows you to file taxes and payroll taxes on behalf of a business, and to show individual employees. You can get an EIN at the same time as you file if you apply for it online.

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    Protect your company and its assets with general liability insurance. There are two amounts you need to keep in mind when applying for a specific amount of insurance: the actual value of the company; and the perceived risk for being sued. Because you are basically responsible for reporting other people's business incomes and expenses, and paying them the money they make from their individual jobs, the chances of having one sue you for mismanagement is inherent. Make sure you have plenty of coverage to protect yourself from legal hassles.

  4. 4

    Hire a lawyer to review your contracts and make sure they are binding. You will need clients to sign a contract giving you the right to operate on their behalf.

  5. 5

    Hire accountants to take care of the payroll and billing your client's customers. Be prepared to arbitrate between your clients and their customers. These interactions can range from daily contact to occasional disputes.

  6. 6

    Hire someone to program your website in order to attract clients. Market your new business online on freelancing forums, direct-marketing e-mails, and on freelancing job search boards.

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