It’s 2018, and we are a part of a society that is dubbed the “Gig Economy” as many individuals have decided to take the leap and start their own business. However, they may be unaware of the options, or choices, available: to stay self-employed or incorporate. There are both pros and cons for either, a lot of it dealing with risk. Many entrepreneurs and small business owners tend to cut down costs wherever they can, especially when first starting out. With doing so, it may come to mind whether or not to pay Employment Insurance (EI), or to incorporate.
Employment Insurance (EI)
EI is defined as the percentage of your earnings that is withheld from your paycheck, if you are an employee that is remitted to the government. If you lose your job, or take maternity leave, you will be entitled to 55% of your earnings up to a maximum of $55,000/year, this ends up being about $900/two weeks.
As a self-employed individual it is increasingly important to know and understand the options available to you. For example, you are entitled to EI provided that you continue to pay EI premiums to the government.
To sign up for EI and to learn more, follow this link for a full EI overview.
Incorporating
Incorporating your business can come with some advantages, such as potentially lower taxes depending on your particular situation and on the province in which you operate.
Incorporating can also have its disadvantages, such as the cost and the additional paperwork. Sometimes it may not be worthwhile to incorporate when you’re just starting a business. However, once your business becomes profitable, incorporation can offer several significant benefits.
To set up your corporation you have to apply to the federal or a provincial government, which depends on whether or not you plan to do business in more than one province (therefore you file federally). You also need to submit a unique name, proposed bylaws and the name(s) of the first directors.
You can avoid the time of finding a unique name by asking to be assigned a number, in turn creating a numbered corporation. You are then issued a certificate of incorporation, indicating that you are the owner of a separate legal entity that pays taxes in its own right.
So when do the benefits kick in? Generally, corporate tax rates are lower than personal tax rates. However, your company has to generate a substantial profit before this becomes an advantage. Except if you’re relying on your company’s profits to support your personal living expenses, as your company will have to pay you enough to live – meaning you have to pay personal income tax on that amount, thus eliminating the tax advantages.
Simply put: so long as you’re earning more than you need to live on, incorporation can be advantageous.
Another disadvantage of incorporating is when your business incurs losses. If you delay incorporating, you can apply these losses against other income, such as continuing to work at a salaried position while starting your new venture. However, if you incorporate right away, these losses remain within the corporation and are applied against future income.
It’s important that you carefully examine whether you want business losses to reduce your personal income tax or remain in your business, and time your incorporation accordingly. It’s even more important that you contact a trusted business advisor to assist you during these initial stages. You can’t put a price on valuable advice that ensures your success.
Contact KBH for more details: info@kbh.ca
Source: Incorporating in Canada