Contractor for a small startup, big project coming up: should I form a company around myself?
I've been doing some development work here and there for a friend of mine who is trying to start up a web-based branding/marketing company in Canada (I am also in Canada). To my knowledge he isn't incorporated. I'm being paid as a contractor.
Recently he told me that he had a large project coming down the pipes that will make each of us six figures this year. This is perfect as it would pay for my tuition and all my expenses and I could finish school debt-free and with a head-start. But I've started wondering if I should form some kind of corporation around me. I'd like to:
- Minimize the taxes I have to pay (Someone told me that I'd be losing 50% to income taxes)
- Write off a new computer (I really need one)
- Write off a fraction of a car (I don't have a car, and I'm going to school out of province; it's a huge pain--plus I need to make regular four hour trips for meetings with the company who has commissioned this project)
- Protect myself from lawsuits (Apparently this product is being funded by several large companies who want it; that worries me)
I don't really know anything about the pros/cons of different types of companies, or how business taxation works in Canada, or anything to do with owning a business really. I'm looking for some guidance on whether this is the right move, and if so, what kind of corporation to form and what steps I need to take.
3 Answers
The answer to your question really depends on the laws of the country in which you are based, so you should see a Canadian accountant and/or lawyer to determine this.
If you are a contractor to your friend's business and not partners in the business together, then it makes sense to set up your own legal entity. This would give you liability protection and also the ability to create your own tax deductions. Personally, I would definitely go this route if I were taking on large contracts. You can find information about incorporating in Canada here and I am sure the appropriate government website will have heaps of info for you too.
Make sure once you incorporate that you establish proper legal agreements between your friend's company and your own. I know you are friends, but if things go wrong, having proper agreements in place make it easier both for the business and for your relationship.
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Awesome, thank you, this is what I suspected was the case. What sorts of legal agreements exist that suit the occasion of "I'm incorporated now?" Currently I just have a work-for-hire style contract with an NDA, is there more if I'm incorporated? – Carson Myers 13 years ago
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@Carson: In the US, the contracts are usually basically identical, except that where your current one has your name, a new one would have your company name, and then the signature line lists you as signing on behalf of the corporation rather than as an individual. – Bob Murphy 13 years ago
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+1 Bob. That's my understanding too – Susan Jones 13 years ago
You both could form a company together and write off taxes on items you've described. From then on, no one could come after you but only after your company. You can take salary+equity and be happy. Bare in mind that, your computer and car will belong to the company and not your personal asset.
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What if my friend just wants to incorporate his startup and not bring me on as a part-owner? We're friends after all, and we don't really have the same vision. I hadn't considered the computer and car being owned by the company though, thank you. – Carson Myers 13 years ago
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In that case, just work either as an employee or contractor. You will not be pulled in any lawsuits, only the company if it is incorporated atleast by your friend. You can always write off taxes even if you are a contractor (including computer, gas, hotel etc.). I dont really see a point for you to incorporate by yourself. – Xoail 13 years ago
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I thought you could only write things off if you are incorporated – Carson Myers 13 years ago
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Well a contractor is also an independent company without any incorporation. Who has to pay the bills, insurance, and pretty much everything by self. I work as a contractor and take liberty in showing my expenses in travel, hotel, gas when I file taxes. But again, not sure if that applies in canada. My guess is it should but meet a lawyer or somebody to get an idea. – Xoail 13 years ago
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Alright, thanks for the advice – Carson Myers 13 years ago
The answer regarding the taxes is that it depends. Being incorporated might reduce your tax load, but then again, it might not. If you pay yourself a salary out of the corporation, then you will still have to pay tax on that income regardless (thereby negating the percentage benefit from 30-40% down to 10-16%). However, if you are trying to defer taxes, then the corporation can help you do so (i.e. leave your savings inside the corporation and only take as salary what you need to live on, keeping yourself in a lower tax bracket).
The write-offs can be done whether or not you are incorporated. Being self-employed, you can pretty much write off the same things that the corporation would be able to write off, so that doesn't really affect the decision. It might help you be better organized about it, however.
Legally, being incorporated will protect your personal assets from most liabilities in Canada, and for that reason alone, it likely makes sense to incorporate. The contracts you have will need to be updated to name the corporation as the entity signing the documents instead of yourself, but other than that, should not require much change.
The best advice I can give is to find a decent accountant to determine the best way to tax plan for your personal situation. Form the corporation as yourself as the sole shareholder (or, if married, consider being joint shareholders with your spouse to enable income splitting) for liability purposes, and have the accountant determine how much money you should take out of the corporation and in what form (salary/bonus, consulting income, dividends and capital gains, etc).
