Umbrellas and PassThroughs for Contractors/Consultants:

Umbrellas and PassThroughs are companies that group consultants together in a single entity or "package" with which clients and brokers can more comfortably do business due to tax, legal, insurance, or similar considerations. They were created especially to deal with §1706 but they are also helpful in meeting the other concerns that clients and brokers may have, especially working with a one-person business. The consultants may be strangers to each other and be working on completely different projects for different clients and even through different brokers (if any). The consultants join these umbrellas strictly to provide them with this interface through which to work with their clients and/or brokers. The consultants typically run their own Profit Centers or Divisions within the umbrella so that they are unaffected by the other consultants. The umbrella charges an administrative fee for keeping track of and accounting for the divisions and their income and deductible expenses. The umbrella may also offer other services for additional fees.
Strictly speaking, PassThroughs include the overall category, and many of these only provide the minimum required functions, acting as an intermediary which the money will pass through on its way to the consultant, withholding taxes as applicable and perhaps offering insurance and some benefits. In addition to these services, the best Umbrellas also pass through as many allowable tax deductions as possible so that their consultants can realize more of the benefits of being Independent Contractors without having to set up their own business. They also pass through to the consultant the benefit of reaching annual caps on various taxes such as FICA and state unemployment insurance. Many PassThroughs just keep these windfalls for themselves. The term Umbrella is used in most of this page, but many of the PassThroughs listed below do not quite fit the true Umbrella category.
Most large umbrellas are corporations and hire the contractors as their W-2 employees, thus providing Employer of Record service, which is the most well-known and effective way that clients believe that their concerns about §1706 can be met. Some of them also provide umbrella services for those independent contractors which meet the umbrella's own comfort level regarding §1706. There are also other ways of providing an umbrella structure for consultants. Whatever arrangement is used, the umbrella and its consultants remain independent contractors with respect to clients and brokers. The umbrella saves the consultant the hassle of setting up and incorporating a business and most of the work of running it, and can also simplify tax planning.
Umbrellas also typically utilize their economies of scale to afford business insurance such as General Liability, and in some cases Professional Liability (Errors and Omissions), as a benefit to clients; and health insurance, retirement plans, and other benefits to their consultants (especially W-2 employees). Some of them also provide factoring of accounts receivable for an additional fee, paying their consultants regularly regardless of when or if they get paid by the clients. Regardless of other services performed, umbrellas handle the invoicing and collections. They generally do not provide any sales, marketing, recruiting, job matching, or similar functions, leaving these to the consultants and their brokers. This allows consultants and clients to use separate matching services or marketing brokers to find each other, and to use umbrellas for some or all of the other functions. This in turn allows the services to be unbundled (separately priced) so that they can be compared and can compete fairly in a free market. This should help break the stranglehold many brokers still enjoy (courtesy of §1706) over consultants and clients alike.
Some of the W-2 PassThroughs also handle H1 or other visa issues. This can provide a stable visa-holding employer through which a contractor can work contracts for many clients, with or without brokers, increasing the contractor's flexibility and marketability, and ultimately helping to reduce the rate disparities.