DECIDING TO INCORPORATE
Last week I talked about my first days setting up my sole proprietor business over 8 years ago now (click here to read about that). Two years ago, I marched down to the registry office again and officially became a corporation: Clear Eyes Consulting INC. Three little letters tacked onto the end but a whole different world of requirements, rules, and expectations. But let’s back up. I want to take you through how I decided to make the transition to a corporation.
There are a few considerations when deciding to incorporate – autonomy, risk, and taxes.
Legally speaking, as a sole proprietor, you are, well, you. Regardless of your business name, legally, you are Jane Doe, John Smith, or (in my case) Tanya Tucker. When you’re a corporation, you are a separate legal entity; it’s kind of like having another kid - “Tanya Tucker Jr”, and instead of a SIN number, it gets a business number.
When I started my biz, I really didn’t know where things would go, so for simplicity, Me = Clear Eyes worked just fine; it was easy, and if I decided that it wasn’t for me, it would be easy to just walk away from. Six years in, though, I had a whack of clients, an employee, LOVED what I was doing, and had big plans for what I wanted to do; I was in this for the long haul. I started thinking long term about what happens when I want to retire? How do I have a succession plan for an entity that is legally just me? Or, what if when I retire, there’s something here that I could sell? You can’t really sell a sole prop (you can, but not the same as selling a corp), and I want ALL the options. One point Corporation.
Personal Liability is ultimately asking “what are the chances that you might get sued”. I know, its not something we want to think will happen to us, and as Canadians it’s a lot less likely that our American neighbors, but it’s still a potential. Make food? Well, you could make someone sick. Baby Clothes? Is there a choking hazard? Money chick? You could embezzle your client’s money (note this is JUST an example, I have never done this ;P). So for me, this wasn’t a big factor in my “to incorporate” decision. From the get-go, I got business liability insurance that protected me (incorporated or not) from any “errors or omissions” that I might do in my work. I have basically the same insurance as a corp that I did as a sole prop, and I don’t really feel any safer behind the corporate “veil”. Truth be told, I have a serious distrust for the legal system, and I’ve seen first-hand how lawyers get around this artificial corporate protection to go after the owners/shareholders. They will go after whoever they think has money to payout; if there’s nothing to take in a corporation, they’ll find a way to go after you personally. Its complete BS. Rant over. No point for either.
Taxes – ok this was a big one for me. As a sole prop, all your profit is reported as income; it doesn’t matter if that profit is still sitting in your business bank account, or is sitting in the pockets of skip the dishes ;) If “on paper” you made 50K, you’re paying personal taxes on 50K. When I was just starting and not really making any money, it was fine. Any money I made, we needed / spent, so there wasn’t really anything sitting in an account that I was paying taxes on. However, as I started to grow, so did the bank account, and we didn’t need or use it all. Now I was paying higher tax bracket taxes on money I didn’t really need (yet!). When you incorporate, your business pay only 11% taxes on its profit – way better than any personal tax rate – but here’s the thing, you will still need to pull money from your business. Whether as a salary or as dividends, you’ll inevitably need to earn something from your biz, and when you do, you’ll pay the personal tax rate on that money. CRA will always get there share ;) But here’s the thing, let’s say you need 50K for your personal income, but your business shows a profit of 100K, here’s a ROUGH example of how your tax bill plays out:
That’s oover 12K in taxes that you’ve saved. 12K. I don’t know about you but that’s money that I would WAY rather be with me, than with the feds. One HUGE point Incorporation.
The final consideration in my decision to incorporate was cost. Being a corporation is expensive – and it can be REALLY expensive. When starting out, and not having any money, the $80 to register a trade name was as much as I was willing to spend. With an income and clients, I could stomach the $400 incorporation fee. But its not just that…depending on your confidence (or resourcefulness), if you decide to hire a lawyer to prepare your incorporation documents (i.e. bylaws, share structure, etc), you can add another $2000 to this tally. As a self-declared cheapskate (and knowing my inherent dislike of lawyers), there was no way I was paying that, so I full on DIY’d my incorporation documents. Here’s the thing; lawyers will try to scare you into thinking that its SO difficult to fix something if you do it wrong. I call BS. I’ve had a client who’s corporation name was misspelled – know what it took to fix it? 20 minutes at the registry, and a $100 to file the change. It was nothing. Don’t let fear mongers bully you into a 2K bill; just my 2 cents ;)
Anyways, registering is one thing, but then you also have to file an annual return to KEEP your corporation alive. No this is not the same as filing your corporate tax return – that you file with CRA; the Annual Return is filed with your provincial registry office (where you incorporated in the first place), and if you don’t file it, eventually they will “dissolve” your corporation, and technically you won’t be legit. It’s not like someone will come shut you down (I don’t think anyways!), but if someone comes along and wants to register a business with your exact name, its not longer protected. Your annual return will cost you about $80 a year – every year, until you shut down or sell.
The last cost is your corporate tax return. A personal tax return can be DIY’d, or done for you fairly cheaply, depending on your complexity. Corporate tax returns, however, are ridiculous. I’ve had clients that have paid upwards of $5000 for a tax return from an accountant; the lowest I’ve seen is $1500. I find that incredibly expensive and wouldn’t pay that much, no matter how much I was making. Granted there are some circumstances that you HAVE to have a CPA do your year end/taxes, but in most of our cases, we don’t need these three letters to stay in CRA’s good books. In an act of rebellion, I learned to do simple corporate tax returns so that I wouldn’t have to pay some overpriced accountant to do something that I know I could do (PS – if you want a SIMPLE corporate tax return done, for NOT a stupid price, email me). Point – well, this point just goes to me, cause I’m stubborn and refuse to overpay for shit.
There you have it. At the end of the day it was Autonomy and Taxes that pushed me to incorporate. It might be different for you, or you may decide that now is not the time (an might never be the time!).