Thursday, September 30, 2010

Sole Proprietor vs Incorporation for Independent Contractors

As a self-employed independent contractor you're an entrepreneur and a risk taker. You control your destiny by developing your skills, producing exceptional work, expanding your networks and building a personal brand. If you add excellent communication skills to your repertoire then businesses will compete to hire you and you'll have more work than you can handle.That's why some people choose entrepreneurship, because they feel that the rewards outweigh the risks.

How do you know when it's time to get incorporated? Here are some points to consider as you weigh the pros and cons of incorportating your business:

1/ Cost
One of the biggest advantages of sole proprietorship is that setting up and administering the business is comparatively easy and inexpensive. It costs $1000 or more to incorporate your business depending on who you hire to assist you with the process.

2/ Liability
One of the main advantages of incorporation is limited liability. A sole proprietor assumes all of the liability for the company. As a sole proprietor your personal assets, such as your house and car can be seized. As a shareholder in a corporation, you are not responsible for the debts of the corporation unless you have given a personal guarantee.

3/ Corporations Carry On
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.

4/ Tax Credits
Income tax rates are lower for Corporations than for personal income. Using tax planning, the tax burden can be reduced by earning income through a Corporation, due to the lower corporate tax rates.

5/ Income Control and Tax Deferral
If you are incorporated, you have options to determine when you personally receive income from your corporation. Being incorporated allows you to report your income at a time when you will pay less tax. You may be able to realize tax savings if you receive your income at a time when you are in a lower tax bracket or if taxes have fallen.

6/ Income Splitting
With a Corporation, there exists the opportunity to pay shareholders salary, dividends or a combination of the two. Your spouse and/or children could be shareholders in your corporation giving you the opportunity to redistribute corporate income to family members with the lower incomes taxed at a lower rate.

7/ Perception
Some people perceive corporations as being more stable. Having Ltd., Inc., or Corp. as part of the company’s name may help you attract business.

8/ Paperwork
Incorporation brings with it extra accounting and paperwork. Corporations must maintain minute books, corporate bylaws. Other required corporate documents are register of directors, the share register and the transfer register.

9/ Non-Calendar Year Ends
Corporations have the ability to choose their year end and not be restricted to a calendar year-end as with a Sole Proprietorship. This opens up the possibility of bonus deferrals. Choosing a year-end may be better for year-end paperwork filing should your business be busy at the end of the calendar year. By incorporating you can choose to have your year-end fall during a slow period.

I‘ve outlined some of the advantages and disadvantages of incorporation versus sole proprietorship but what’s the bottom line? Is getting incorporated worth it or not? I recommend that you discuss your personal situation with your accountant and lawyer before deciding.

Further Reading:
Business Registration in Ontario
How to Incorporate Your Business
10 Job Networking Strategies to Consider if You're a Newcomer to Canada
3 Resume Publishing Tools to Pump Up Your Job Market Value

Written by: Tim Collins

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