Tell me why I should or should not incorporate in Ontario, Canada
August 31, 2012 11:46 AM   Subscribe

I'm a web developer in Toronto who is currently operating as a sole proprietor. A prospective new client would really like to hire me for a major new project, but they can only deal with incorporated companies and cannot hire a sole prop. I'm looking for advice on incorporating from a) people in Canada and especially Ontario, but also from b) anyone who has any relevant advice about the experience of becoming an Inc., even if you are not Canadian. Yes, I will be engaging an accountant or lawyer for specific advice if I do decide to move forward, so I'm not worried that some specific advice may not be appropriate for my jurisdiction: I'm just trying to get a broad picture of what it's like (and some recommendations for lawyers/accountants).

My main concerns are the ongoing costs and complexity of running as a corporation given the kind of work I do. I would be the sole owner and employee, I don't anticipate hiring anyone as a sub-contractor, let alone an employee, and I expect to continue working out of my home office rather than a store front. I'll be paying taxes and CPP but no EI, as, of course, I would not be eligible for EI payments as owner/sole employee. If it weren't for this client, I'd probably be staying sole prop.

Arguments FOR incorporation: Are there any other advantages that I'm missing?

1) This project alone could bring in as much money over the next few months as I've made all year so far. The hourly rate will be the highest I've ever charged. The work is well within my comfort zone and I know that I can deliver something really good. I have worked with my main contact before and we got along very well.

2) This may open the door for further work with the same company, but it could also make me eligible to work for crown corporations and other companies who also require that you be incorporated.

3) The usual reasons why people say that incorporation offers advantages: you can offset income to years where you can take less of a tax hit and it protects your personal assets in case of legal action.

Arguments AGAINST incorporation:

1) Incorporating, a name search (if I don't choose to operate as a numbered corporation), consulting with an accountant and/or lawyer, getting accounting software and setting up a bank account and cheques could cost (I'm estimating) $500-1000. Are there any other start up costs that I'm missing?

2) I could do my own corporate taxes, but I'd feel more secure going to a good accountant, so that's probably another $500+ a year. (This fellow has been recommended here before: any other feedback or recommendations for Toronto accountants or lawyers?).

3) As a sole prop, tax writeoffs for software, other business purchases and use of my home office have been pretty straightforward. This may be best answered by a professional, but if you have experience in this area FOR CANADA, let me know.

4) Liability insurance: another client has asked that I get liability insurance to continue working for them as a sole prop already, so I expect that I should get this if I go coprorate. My first round of quotes (for a sole prop) put that at $800-1000, but from what I can see, a corporation doing the same kind of work would be charged closer to $2000. Canadian incorporated web/IT people: does that sound about right? And are there any insurance companies you would recommend?

I think that's about it. Thanks!
posted by maudlin to Work & Money (13 answers total) 6 users marked this as a favorite
 
I can't speak to these issues directly, but I've been in similar situations before, and in those situations, the end client had an intermediary agency—which was incorporated—acting as a go-between.

If it doesn't make sense for you to incorporate, you might inquire with this client as to whether there's an agency they work with that can serve this function.
posted by adamrice at 12:00 PM on August 31, 2012


I live in Ontario and incorporated when told to do so by an agency through whom I got work. It has proven to be a major expense. Accountant's fees for filing corporate tax returns are thousands of dollars a year. It has also been complicated and stressful to find an accountant and to try to make sense of what he's doing.
posted by Paquda at 12:48 PM on August 31, 2012


The key benefits are limited personal liability (because you in effect become an employee of your company) and deferred taxes...but that only becomes relevant if your income significantly exceeds your annual expenses. Incorporating does not give a company licence to charge more, despite what some hope for.

Do it if it is required by your client. But don't bother with the hassle of naming your company and paying for a name search. That only makes sense if you are a storefront operation. Opt for a numbered company and operate as a named business. The numbered company only will be relevant to CRA, your accountant and your bank (including cheques, if you still use those 20th century things).

You can save plenty upfront by incorporating online. But be ready for a significant jump in your annual expenses on accounting and possibly a shift in your personal finances in how regularly you pay yourself. Remember: you become an employee of the business.

Hope this helps. AskMefi is a good start, but be sure to get professional advice before you make your decision.
posted by runningdogofcapitalism at 1:46 PM on August 31, 2012


I am a Systems Consultant, work from home in Toronto and I incorporated in 1993. It cost me about $1,500 to set up my corporation. You won't need a lawyer - just a Chartered Accountant.

Most of the time, I'm the sole employee. The $1,300 a year that I spend on my accountant is well worth it. There are many tax write-offs as an incorporated business has to have a physical office, therefore you can write off the 'business' portion' of all housing expenses (mortgage interest, gas, Hydro, maintenance, etc.) in addition to all hardware, software and internet expenses. I incorporated in Ontario and you have to have a C.A. do your taxes (as I understand it). My accountant files the corporate taxes and also throws in my personal taxes. I think I get a very good deal!

I'm not going to give details of my nominal tax rate, but will say that it's almost half of what I'd pay as an employee with no write-offs...
posted by HarrysDad at 1:56 PM on August 31, 2012


I'm in Alberta, and do contract IT work. I'd budget:

$600 for incorporation
$1000/yr for taxes + accounting. I've used these guys before and liked then.
WCB was $200/yr for me as the director of a company (not necessary but some of my larger clients require it from their contracted companies)
Also, you don't want just general liability insurance, you need errors & omissions insurance, which is different. I was quoted around $3000/yr for $2,000,000 coverage.
posted by blue_beetle at 3:36 PM on August 31, 2012


Oh, and for benefits: my net tax rate works out to 10-15% when I combine corporate and personal taxes vs 20-30% when I was a regular employee.
posted by blue_beetle at 3:37 PM on August 31, 2012


You need to talk to these guys: Toronto Business Development Centre. They are an independent non-profit supported by the city and province precisely to assist people like you. They will coach you through all the steps (some of that may involve a nominal fee) and help you figure it all out.
posted by wutangclan at 4:01 PM on August 31, 2012


Do they have LLCs in Canada? If so, and if your client/customer can accept that in lieu of incorporation, you should consider LLC since it doesn't have the annual meeting requirements of a corporation (at least in the US) and has other advantages.

I once used the company MyCorporation to set up an LLC in the US and they were great. I noticed on their site they have a whole section for Canada incorporation:

https://www.mycorporation.com
posted by Dansaman at 4:16 PM on August 31, 2012


Thanks for all the feedback so far!

Accounting: I previously was a part owner of another corporation (rolled up ca. 2010), but dealt with my accountant only once a year for tax prep and filing. He would hand me a list of journal entries to update on my own, and the total bill would usually be about $500. I handled GST/HST installment payments and filing, T4 and T5 filings, and payroll taxes on my own. If you're spending $1000-1300 on accounting in Toronto these days, what level of services are you getting for that amount?

Liability insurance: Sorry, I should have specified errors and omissions, but yeah, that is also higher than expected. I'll look for a firm quote from somebody local (and, again, if anyone can recommend a specific insurance company, that would be wonderful).

Naming the company: From the aptly named runningdogofcapitalism: "But don't bother with the hassle of naming your company and paying for a name search. That only makes sense if you are a storefront operation. Opt for a numbered company and operate as a named business. The numbered company only will be relevant to CRA, your accountant and your bank (including cheques, if you still use those 20th century things)."

Huh. I didn't know you could do that (the old company was incorporated by the original sole owner with a name, and when I took over, I changed it to a numbered company.)

So I could incorporate as ####### ONTARIO Inc., but in addition, I could choose to search for and register a name to operate under in this province. This could appear on marketing materials (web site, business cards, signs) but not cheques, bank accounts or any government documentation. And I wouldn't have to register the name immediately, either. It certainly simple compared to all the documentation you have to provide with the NUANS system during incorporation, although the latter seems slightly cheaper.
posted by maudlin at 5:58 PM on August 31, 2012


Dansaman, sorry, we don't do LLCs up here.
posted by maudlin at 6:02 PM on August 31, 2012


$0.02
Im incorporated in Canada, and I live in Southern Ontario. I have incorporated several business all very small between 1 and 10 employees. Here is my experience.

1) I dont know why anyone would provincially incorporate. I've always incorporated Federally and simply register to do business in Ontario. It is cheaper and easier. Go to ic.gc.ca and fill out the forms and !bango! for $200 you have a federal company (they walk you through the entire process of setting up directors, shareholders, registering in Ontario, ...). You now have a numbered company, which is all you really need (something like 12345678 Canada limited). If you want to register you company with a name then you will need to pay another $40(?$20?) for a NUANS search to make sure the name is available. To this day no lawyer or 'consultant' has been able to tell me why I would register a business solely in Ontario. Creating a federal company is so easy I've often done it drunk!

(warning: my friend paid a lawyer $1500 to setup a company and the only difference between what you can do online and what the lawyer delivered was a fancy embossed binder with the company's name)

2) Every year you need to file minutes/agm stuff. Again this is a simple process done at ic.gc.ca. I login, check the 'Nothing to report' box and pay $20. Done. (After I take my other shareholder out for a nice dinner to discuss the business)

3) By far the toughest part is the accounting. Get an accountant. Full stop.

4) There are some limited liability protection ... but as the sole employee this has proven less protection in law than people think. Moreover, nobody is going to lend a new Inc. $$ without you personally underwriting the loan.

5) There are good $$ advantages. If you are building up personal equity, as a sole proprietorship you will pay personal rates (lets say 40%) on that money. As a business (IF YOU LEAVE IT IN THE BUSINESS) you will only pay business rates (lets say %20). If you are liquidating the companies assets every month to pay for rent/groceries, you will be taking that $$ as income and have to pay personal rates.

But if you buy a computer you will be using 20% taxed monies as opposed to %40 taxed monies ... but the computer will be the company's and not yours.

Any $$ you withdraw for personal items will eventually get charges personal rates, the 'game' is to leave as much money in the company as possible and use the company's bank account to purchase any capital assets that can be legitimately considered business activities and justified to CRCA auditors. (Playing fast and loose with this rule is illegal!)

Given your $$ needs and what the company can provide have your accountant explore options like dividends, management fees and a salary. For the first time last year I took dividends from the company because it saved me a couple of thousand dollars (woot!)

Many more remittances and fillings GST, CPP, payroll deductions, possible WSIB, and of course company income tax. Accountant, accountant, accountant.
posted by njk at 8:28 AM on September 1, 2012


Thanks, njk. My previous company was incorporated in Ontario, so there seem to be some differences. The NUANS search and registration seems like more hoop-jumping, though, as you have to justify the name every which way as part of the process.

Right now I'm leaning to wards incorporating as a numbered business and operating under a name, but I'll hash out the details with an accountant.
posted by maudlin at 6:34 PM on September 2, 2012


Update: have incorporated in Ontario, have added an operating name, and have found a reliable accountant. So far, so good.
posted by maudlin at 4:09 PM on January 1, 2013


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