Many people in business have heard of an umbrella corporation, or have heard of a company operating under a corporate umbrella, without having a clear concept of what that is.
"Umbrella corporation" is one of those terms that gets tossed around, but there isn't always a clear idea about what it is. That is because there is no formal business category for an umbrella corporation. Unlike a C-Corporation or S-Corporation or LLC, which are incorporated, the corporate umbrella is more of a concept than it is a legal entity.
Like an umbrella protects anyone standing under it, an umbrella corporation is a corporate shield or grouping that protects the smaller companies under its "umbrella." There are several advantages for companies to work together in this way.
Here are Three of the Biggest Advantages for the Companies
Benefit #1 - Group Benefits
When companies work together they may be able to take advantage of certain benefits that the individual companies might not qualify for, or would not be able to afford on their own. Because of the number of people involved, many benefits become more accessible and affordable.
Some benefits, like 401K plans and health care plans, can be very expensive for individuals or small groups to purchase on their own. Being a part of an umbrella corporation lowers the cost for each individual. The bigger the group, the lower the cost can become.
Some insurance companies that specialize in business plans will not work with small companies. The size of the makes more of these plans available. That gives the company leverage to consider several different insurers and get the best possible coverage for their money.
Benefit #2 - Sharing of Resources
It is difficult for smaller companies to pay for all of the administrative support they need to operate. Departments like human resources and legal resources are very helpful, but many times are impractical for a small company to have. Many times administrative personnel have to take on multiple functions to cover all of these areas.
By using the this concept, the larger corporation can supply a lot of the administrative support for the smaller companies. The smaller companies all pay a portion of the cost of operating that department, but no one company has to bear the entire cost.
In the case of the legal department, the attorneys for the main corporation are able to support all of the smaller companies that fall under its umbrella. Each company contributes to the legal departments cost, but the amount is much more affordable than if the company had to pay the entire expense.
Benefit #3 - Discounts on Purchases
While the buying power of each individual company might be somewhat limited, the umbrella corporation could be a buying group that qualifies for some significant discounts on their purchases. Because the group purchases so much, each entity can take advantage of the discounts.
One example of this would be office supplies. One company might not use enough office supplies to make a difference to the supplier, but numerous companies grouped together under one umbrella can make a big difference to the supplier. In order to ensure that they remain the supplier for the umbrella corporation, the supplier will be willing to offer better prices to all of the companies involved.
The use of the umbrella corporation is not uncommon in the business world. By grouping several smaller companies under the umbrella of a parent corporation each company can take advantage of benefits and discounts that would not be available to the smaller groups.
If you are considering becoming part of an umbrella corporation, you should seek advice from a legal attorney to make sure it is the right move for your company.
For more information See:
Points to Keep in Mind
Corporation and LLC Tips: Original articles on the ins and outs of setting up a corporation and LLC.