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-   -   Sole proprietor VS Incorporate (http://www.maxbimmer.com/forums/showthread.php?t=154345)

damameke 11-14-2012 12:27 PM

Sole proprietor VS Incorporate
 
Hello maxbimmer, need some insight on this..

Besides the cost of registration as well as liabilities(I understand this), which is the preferred route?

After so many years as a salaried employee and now semi retired and is offered to come back as a consultant(IT field), which is the prefered route to take in terms of allowable deductions..thanks

Blackedout95 11-14-2012 04:08 PM

Incorp. for two reasons, taxation and legal, that simple.

T.Dot_E30 11-14-2012 04:47 PM

If you are the only employee and you plan to keep(or need to) everything you earn there is not much tax benefit of incorporating because remember you have to pay yourself a salary, you are taxed on that salary. Usually the benefit is bigger when the business makes alot of profit ($100k - $200k after expenses) that way you can defer how much to pay yourself each year and money is kept within the business to grow it. If your paying yourself all of it because the business isn't making much you're not going to get much tax benefits.

Alot of people do it with the intention of mixing their books (tax fraud), making the corporation pay all their personal expenses (mortgage, utilities, car, etc) and not pay themselves a salary that is taxed. Good luck hiding those paper trails if you get audited. If they see you have no personal income and all personal expenses funded through the business, they'll know whats up. As a sole proprietor you are still able to claim alot of expenses to reduce your taxable income. Again, my opinion without committing fraud is if your personal taxable income (ie after expenses/not revenue, ) isn't close to 100k+, you shouldn't do it solely for tax reasons because the benefits are minimal/non-existent it isn't worth the hassle unless you have a lot of assets to protect, in which case you aren't doing it for tax reasons anymore. Other than tax reasons, you have risk/liability. Are you in a business where you can be sued? If the risk is high, then you want to protect your personal assets and have them sue the corporation so you don't lose your 'house', and liability is a big reason to incorporate when there is that risk. Don't just assume you'll make more, in some cases it might end up costing you more but your personal assets are protected. But your situation may be different, so you should seek professional advice from an accountant. (Keeping in mind they make more money from you when you incorporate because of all the paperwork)

A quick search and this seems to explain this point.
http://www.ormack.com/incorp.html

damameke 11-14-2012 07:00 PM

Quote:

Originally Posted by T.Dot_E30 (Post 1589344)
If you are the only employee and you plan to keep(or need to) everything you earn there is not much tax benefit of incorporating because remember you have to pay yourself a salary, you are taxed on that salary. Usually the benefit is bigger when the business makes alot of profit ($100k - $200k after expenses) that way you can defer how much to pay yourself each year and money is kept within the business to grow it. If your paying yourself all of it because the business isn't making much you're not going to get much tax benefits.

Alot of people do it with the intention of mixing their books (tax fraud), making the corporation pay all their personal expenses (mortgage, utilities, car, etc) and not pay themselves a salary that is taxed. Good luck hiding those paper trails if you get audited. If they see you have no personal income and all personal expenses funded through the business, they'll know whats up. As a sole proprietor you are still able to claim alot of expenses to reduce your taxable income. Again, my opinion without committing fraud is if your personal taxable income (ie after expenses/not revenue, ) isn't close to 100k+, you shouldn't do it solely for tax reasons because the benefits are minimal/non-existent it isn't worth the hassle unless you have a lot of assets to protect, in which case you aren't doing it for tax reasons anymore. Other than tax reasons, you have risk/liability. Are you in a business where you can be sued? If the risk is high, then you want to protect your personal assets and have them sue the corporation so you don't lose your 'house', and liability is a big reason to incorporate when there is that risk. Don't just assume you'll make more, in some cases it might end up costing you more but your personal assets are protected. But your situation may be different, so you should seek professional advice from an accountant. (Keeping in mind they make more money from you when you incorporate because of all the paperwork)

A quick search and this seems to explain this point.
http://www.ormack.com/incorp.html

Thanks T.Dot for the detailed explanation, 1st time going back as a consultant, so i am working for myself and only employee and no risk at all..
my accountant just told me to incorporate at $800, my understanding is that u have to have more than a client/customer to be a sole proprietor, is this right?..

dcramer 11-14-2012 07:29 PM

800 is way too much. You can do it yourself for about 60 bucks.

Getting your taxes done costs more, at least 600 per year as a corp.

It is much easier to keep your income separate. As a sole proprietor your income is basically your salary.

I also have left money in my corp for a rainy day. You can't do that with a SP

Ya, take reasonable risks with writing stuff off. I doubt you can come up with something they haven't seen

aspen540 11-14-2012 07:34 PM

if you realistically plan on billing 200k+ and wanto keep most of it go corp.

damameke 11-14-2012 08:23 PM

Quote:

Originally Posted by dcramer (Post 1589353)
800 is way too much. You can do it yourself for about 60 bucks.

Getting your taxes done costs more, at least 600 per year as a corp.

It is much easier to keep your income separate. As a sole proprietor your income is basically your salary.

I also have left money in my corp for a rainy day. You can't do that with a SP

Ya, take reasonable risks with writing stuff off. I doubt you can come up with something they haven't seen

$800 is all in , including gov's fee($360) name search etc etc..

I dont start till Dec 3, so I have 2 weeks to think about this.. I dont do "gray" area deductions, only allowable deductions to minimise taxes, I dont intend to play with CRA.

Thanks for all the replies

dcramer 11-14-2012 08:30 PM

well you can certainly do SP for a while and then incorporate after you have some money.

Well gray area deductions are exactly that. CRA has an aggressive version of their code, accountants have another. Just be reasonable.

One thing that I do do is my one car is owned by the corp so all repairs and gas are deductable as well as GST on purchase.

Dave

damameke 11-14-2012 08:42 PM

Quote:

Originally Posted by dcramer (Post 1589364)
One thing that I do do is my one car is owned by the corp so all repairs and gas are deductable as well as GST on purchase.
Dave

Can one do the same with SP or it has to be INC?
I will know more once I sit down with my accountant tomorrow or Friday.

Thanks dcramer

dcramer 11-14-2012 08:46 PM

You can do it, but the line is less clear. Since the car stays in your name in a SP. Technically you are supposed to declare it in your personal income as a benefit, but I have 2 cars so I can argue that one is just for business.

T.Dot_E30 11-14-2012 09:53 PM

You can claim a portion of all your auto expenses as a sole proprietor, including depreciation.

sirex 11-14-2012 10:14 PM

if you do it right, by incorporating you can pay your self dividends rather than a salary. which means you pay practically no tax on $80,000.

ScotcH 11-15-2012 12:34 AM

Quote:

Originally Posted by sirex (Post 1589383)
if you do it right, by incorporating you can pay your self dividends rather than a salary. which means you pay practically no tax on $80,000.

Totally incorrect. The corp pays the tax. Dividend is payed out after tax. They amount to the almost the same thing in the end if you are the only employee.

OP: If you are making money, incorporate. If you will lose money, sole prop since you can write off against personal income. This is only good for a couple years though.

KIRASIR 11-15-2012 02:16 AM

Quote:

Originally Posted by damameke (Post 1589362)
$800 is all in , including gov's fee($360) name search etc etc..

I dont start till Dec 3, so I have 2 weeks to think about this.. I dont do "gray" area deductions, only allowable deductions to minimise taxes, I dont intend to play with CRA.

Thanks for all the replies

Let me add my 2 cents, If you are an IT Consultant (external, contractor, etc.), chances are that you will NOT be "hired" directly by the company itself, but you will be sub-contracted though an agency. Most of the agencies today require the contractors to be incorporated in order to remove any potential liabilities with regards to the employee/non-employee taxation issues.

If your company doesn't use an agency then they will definitely force you to incorporate in order to prevent you from claiming in the future that you are their employee, and hence should have been receiving insurance, benefits, CPP contributions, etc.

Basically if you are a sole proprietor and on a contract by a company from which you get a regular paycheck for the services rendered as well as work on-site using their equipment (99% of the IT contractors today), in the eyes of the CRA you will be considered an employee and the company should been making certain contributions to CRA on your behalf. Additionally, if your personal taxes were audited, you could be asked to pay taxes with penalties going back up to 7 years for all the years you claimed to be a sole proprietor receiving regular cheques from only one company/client.

From this possibility alone, given the field where you are, I would recommend you to incorporate. The paperwork is more, the taxes are a bit more painful to calculate as they would have to be done twice but in the end you would be a "real business on paper". Then the only issues would be the allowed business deductions and expenses, and that IS a gray area but as they say: "No risk - no gain" :D
BTW technically you CAN have a guard dog to protect your business...;)

Now if you do decide to incorporate, do it yourself. It takes literally an hour and costs around 380 bucks vs paying $800. The extra $400 is usually charged by the "agents" for the services rendered. ;)


Good luck with your new job.

damameke 11-15-2012 02:55 PM

Quote:

Originally Posted by KIRASIR (Post 1589412)
Let me add my 2 cents, If you are an IT Consultant (external, contractor, etc.), chances are that you will NOT be "hired" directly by the company itself, but you will be sub-contracted though an agency. Most of the agencies today require the contractors to be incorporated in order to remove any potential liabilities with regards to the employee/non-employee taxation issues.

If your company doesn't use an agency then they will definitely force you to incorporate in order to prevent you from claiming in the future that you are their employee, and hence should have been receiving insurance, benefits, CPP contributions, etc.

Basically if you are a sole proprietor and on a contract by a company from which you get a regular paycheck for the services rendered as well as work on-site using their equipment (99% of the IT contractors today), in the eyes of the CRA you will be considered an employee and the company should been making certain contributions to CRA on your behalf. Additionally, if your personal taxes were audited, you could be asked to pay taxes with penalties going back up to 7 years for all the years you claimed to be a sole proprietor receiving regular cheques from only one company/client.

From this possibility alone, given the field where you are, I would recommend you to incorporate. The paperwork is more, the taxes are a bit more painful to calculate as they would have to be done twice but in the end you would be a "real business on paper". Then the only issues would be the allowed business deductions and expenses, and that IS a gray area but as they say: "No risk - no gain" :D
BTW technically you CAN have a guard dog to protect your business...;)

Now if you do decide to incorporate, do it yourself. It takes literally an hour and costs around 380 bucks vs paying $800. The extra $400 is usually charged by the "agents" for the services rendered. ;)


Good luck with your new job.

KIRASIR: that was very informative, much appreciated.

and yes, I am recall to come back as a consultant, so no agency ...I spoke to my accountant and he basically said INC. and his fee is just $100, the rest are gov's fee($360) , name search($14) etc etc($$$).. can I really do it for $380?, I dont mind paying the $800 for the sake of my sanity.. lol


Anyway.. guys; thanks for the valuable information..


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