Having freelanced in a number of countries, this is actually a fairly common requirement.
If you interpret 'freelance' as "running a business", it's even understandable. Compare the realities of a business and an employee.
- A business gets to deduct most of its expenses before calculating its taxes, whereas an individual pays their expenses from post-tax monies. For example, if I have a company and travel to a client's premises that is (usually) a deductible business expense. As an employee, my travel to the office is a personal expense.
- Businesses often pay taxes at lower rates than individuals, and have options to structure their payouts in the most favorable manner (small salaries, HUGE dividends for example).
- Businesses can limit legal liability in ways that an individual can not.
- Employers are required to provide many benefits (read "expensive") for their employees which they do not need to give to their suppliers.
For the first two reasons, most countries pay close attention to who qualifies to be called a "business". It's simultaneously about maximizing their tax revenues and protecting people who would otherwise be employees from abuse.
Sometimes they try to limit this by requiring a minimum number of employees, or limiting how long you can work exclusively for one client, or measuring the actual financial risk you take in each transaction. The upshot is that tax agencies will look very closely to see if there is an effective employment between a company and an individual. If they (retroactively) decide that a relationship was actually one of employment, the company (in this case your University) can find themselves liable not only for large fines, but also back-taxes and benefits.
By requiring you to form a company, and to contract on a company to company basis, the University is trying to minimize the chances of your relationship being deemed employment at a later date. Again, it's not unknown for a tax agency to 'lift the corporate veil' and ignore your company - but it places a hurdle in the way.
Thus, in the UK (When last I contracted there) it was common for contracts to be written 'back to back' and include a middle man:
- The contractor was the sole employee of a Limited Company
- The contractor's company had a contract with an agency to provide their employee's services at an hourly rate at a specific time for a specified period.
- The Agency had a contract with the client to provide a person at a (higher) hourly rate, for the same time and period. This also gave them the option to replace you should you quit.
In others words there were two legal entities between the contractor and the client, and the tax man had a lot more work to prove actual employment. However, there were trip clauses (for example, you would rarely get a contract which lasted more than 12 months without a break of some kind).
I have successfully bypassed all this and gone direct with clients as an Independent Contractor with a bullet-proof tax-situation. In one case, it took the client's legal department about 5 minutes to declare it as fine (and I knew those people: they could take 2 weeks to agree on a single sentence in a contract). But it meant the following:
- I offered a fixed-price quote (took significant financial risk)
- I provided all my own tools (scopes, computers, compilers, etc)
- They said what they wanted, set budgets etc: I decided on how it would be developed (limited how much control they had).
- I worked mainly from my own premises, going onsite only for delivery/meetings/acceptance testing etc.
That was here in the US, where simply 'owning' a company has significant costs (both financial and time). In the UK, I would set up a company in a heartbeat - or even one per contract. From memory, I could get a limited company completely setup in about an hour for around 100 pounds - 24 hours if I cared what it was called.