Whether you choose to be a sole proprietor or an incorporated entity depends on your career goals and personal situation. We’ll go through the different steps and two options below, as many consultants are unaware of the benefits that come with each.
As a consultant, there are many advantages to incorporating, particularly if you wish to remain a consultant long-term. As an incorporated entity, you could benefit from a more favourable tax rate and income splitting. Of course, the decision to incorporate or to work as a sole proprietor has to suit your own personal situation.
Below, you’ll find steps on how to set up your own corporation, as well as documentation that Annex’s corporate accountant created that has an unbiased review of incorporation vs. sole proprietorship. It is meant to help you weigh the pros and cons of both sides. At Annex, we will work with you regardless of which path you choose.
If you are on a long-term contract or plan to stay a contractor for a long time, we recommend incorporating and here’s why:
Tax savings via dividends
– You can remunerate yourself from the company with either salary or dividends or any combination of both. Salaries are not as tax-effective as dividends. In addition, because you would be considered both the employer and the employee (since you are getting salary from your own corporation), you would have to cover both portions of the payroll deductions such as CPP. This can cost up to $4,800/year. This is why dividends are a more attractive method to pay yourself from the company as you don’t have to worry about making any payroll deductions (saving up to $4,800/year) and you also get a “dividend tax credit” on the personal tax side which reduces the personal tax on the dividends. As a shareholder of the company, you are entitled to take about $25,100 in dividends per year from the company tax free (if you have no other personal taxable income). It’s only above this amount of dividends that you will start to incur personal tax. If you can add other shareholders to the corporation, such as a spouse, partner or other family member that has little or no personal taxable income, you can draw more dividends out of the company with minimal tax. This is what’s called “income splitting.” It costs approximately $1,900 a year to maintain the company (accounting and legal), but the tax savings from this benefit are many times greater than the cost. You cannot take advantage of this as a sole proprietor because a sole proprietor is taxed the same way as an employee.
Tax savings via preferential tax rates
– As a sole proprietor, you are taxed under the same personal marginal tax rates as an employee, but can now deduct expenses against your income. Sole proprietors also have to pay both the employer and employee portions of the CPP on self-employment income which can be up to $4,800/year added on top of their personal tax. If you are incorporated, there is a small business tax rate of 13.5% on the first $500,000 of the company’s taxable income. Then you only have to pay personal tax on what you actually draw out of the company for yourself. So if you don’t draw the funds out of the company then you don’t have to pay personal tax on them yet. As a sole proprietor, you have to pay personal tax on all the taxable income in the year, immediately in that year, at the regular marginal personal tax rates, whether you use the funds or not, and also have to pay both portions for the CPP.
– As a sole proprietor, all your personal assets are up for grabs if you get sued over your work. A corporation gives you limited liability so that your personal assets are not at risk.
Best to review these scenarios with a good accountant!
If you decide to incorporate, there are four steps for setting up your own corporation:
- Incorporate the company
- Register for a GST number
- Open a business bank account
- Register for a WorkSafeBC number
Each of these is described below.
How to Incorporate
If you decide to incorporate, here is an easy and cheap way to do it. Many of our contractors have used this process:
- Step #1: Go to this site https://www.corporateonline.gov.bc.ca/corporateonline/colin/static/colin/html/index.html
- Step #2: Click on Credit Card Customer
- Step #3: Click on Incorporation Application
- Step #4: Click/Print/Read/Sign the Incorporation Agreement (insert information relevant to you)
- Step #5: Click/Print/Read/Sign the Table 1 Articles from the Regulation
- Step #6: Click Next (bottom right)
- Step #7: Follow the instructions
- Step #8: Provide your credit card number
- Step #9: Save the Incorporation PDF you receive which will include your Business Number, Company Name, Address, etc.
This is by far the most cost effective and timely way to incorporate. Most lawyers charge $700 to $1,000 for similar services. You can complete the above process in a short time period and it costs about $350. You will be issued a numbered company such as 0707833 BC Ltd. If you want a named company, you will need to complete a name search to reserve the name which costs about $30 and takes a few days. Note that in order to accommodate income splitting strategies, there would need to be mutiple classes of shares set up in the company when it’s incorporated. Therefore, it may be best In this situation to engage a paralegal or lawyer to set up the corporation.
Applying for an GST Number
The easiest way to apply for a GST number is to call CRA at 1-800-959-5525 (hit the star button after the automated recording comes on) and ask to open the company’s GST account.
Open a Business Bank Account
Pick your favourite bank, bring your incorporation documents, and request a business chequing account – it is that simple. You will complete typical paperwork required when opening a new bank account.
Registering for a WorkSafeBC Number
A common misconception from independent consultants is that carrying WorkSafeBC insurance is not relevant since IT and management consulting professionals don’t work on physically dangerous worksites. It’s true that programming and other IT activities aren’t considered physically labour intensive. However, injuries can occur in any type of industry, location, and circumstance. Carrying your own coverage as a self-employed consultant will actually provide you with more benefits when you make a claim than if you were to reside under someone else’s coverage. Also, if you were to injure someone on the job site, this insurance will cover you from claims that the other individual may make against you.
If your incorporated company is active, you’re required to register for WorkSafeBC insurance. It costs nothing to register. Once you are registered, you’ll be charged annual or quarterly premiums based on the amount of remuneration paid to each worker. It changes every year, but the premiums are a small percentage of your remuneration (up to a maximum of $77,900 in annual earnings per worker for 2014). Premiums usually do not go above $75 per year. IT and management consultants are in the lowest premium category at WorkSafeBC.
One thing you will find useful when registering is to state that you have more than one client and that you have employee(s) (you are an employee of your company even if you only take dividends as payments).
Here is more information from the WorkSafeBC web site: http://www.worksafebc.com/insurance/registering_for_coverage/faqs/default.asp
- What if I’m a shareholder in an incorporated company?
If your business is active, you are required to register. All company shareholders who are actively working in your business are considered to be workers under the Workers Compensation Act and are covered under your company’s WorkSafeBC account.
- What happens if I don’t register?
If you are required to register and don’t, you could be fined and charged the total compensation costs of an injury should one of your workers become injured, plus retroactive insurance premiums.
- How much does it cost to register?
There is no charge for registering. However, once you obtain WorkSafeBC coverage, you will be charged annual or quarterly premiums for your workplace disability insurance coverage. Premiums are directly related to the industry you’re engaged in and the amount of your payroll.
If you need a referral to a great accountant or if you have any questions, please feel free to get in touch with us!