To incorporate or not to incorporate? If you’re an Independent Contractor, that is the question. Being self-employed offers just as many risks as it yields benefits. Since you’re working for yourself--without the safety nets protecting full-time employees-- consulting may be a financial balancing act that seems more like a tight rope, rather than a cake walk.
We all know there exists a certain freedom along with other tax benefits when you're self-employed, but should you operate as a business rather than an individual?
What does being incorporated mean?
Corporations are separate legal entities from the actual business owner. This form of business offers added legal protection, but in the early years a sole proprietorship or partnership will often offer more tax advantages.
Tax Pros: The tax law for incorporated entities states that any income up to $500,000 is taxed at 15.5%. Income tax rates are lower for corporations than for the personal income received by sole proprietors. The tax burden can be reduced by earning income through your corporation due to the lower corporate tax rates. One of the main benefits of getting incorporated is the fact you can take money out of the incorporation tax free! This is known as a tax free loan.
Liability Pro: One of the main advantages of incorporation is limited liability. A sole proprietor assumes all of the liability for their company. As a sole proprietor your personal assets, such as your house and car can be seized. As an incorporated contractor, you are considered a shareholder and not responsible for the debts of the corporation unless you have given a personal guarantee. Unlike a sole proprietorship, a corporation has an unlimited life span. The corporation will continue to exist even if the shareholders die or leave the business.
Non-financial Pros: Asset protection and marketability!
Most major banks and insurance agencies will prefer not to work with sole proprietors. When you’re incorporated, you immediately increase your marketability. This is one of the most important benefits. Simply being incorporated means that you have a limited liability—meaning, the risk associated for financial institutions, insurance companies or even staffing firms is greatly reduced. Staffing firms don’t need to pay EI or CPP for you which makes you as an incorporated entity a lot more attractive to work with over sole proprietors.
Paperwork and data entry cons: It’s true that there is a lot more paperwork involved with incorporating your business. And when tax time rolls around, you’ll have to be a lot more diligent with your receipts and reporting.
Cost con: If you want to get incorporated, it costs $1000 or more depending on who you hire to assist you with the process.
Do you prefer to work as an individual or as an incorporated Contractor? Is getting incorporated worth it or not? Before you decide, make sure to discuss your personal situation with your accountant and lawyer.