If you’re like many independent IT contractors, you’ve probably been operating your small business as a sole proprietor. While starting a business, you’ve been more focused on building your client base than your tax strategy. However, depending on your situation, it may be time to consider incorporating your business so that you can take advantage of potential tax benefits.
Incorporating a business in Canada has both advantages and disadvantages specifically for independent contractors. Here’s a snapshot of how incorporation could benefit you:
- Potential for lower tax rate. This is one of the biggest benefits of incorporation, but you need to talk to your accountant to see if it would work for you at this point. You need to be making enough to support your living expenses and more in order to really get these benefits. The general rule of thumb is that, if you are spending all of your profits to live on, incorporation isn’t right for you yet.
- Limited liability. When you incorporate your business, you protect your personal assets. Your home or vehicle cannot be seized for your business’s debt.
- You could be eligible for the small business tax deduction, which would reduce your tax burden.
- Reputation boost.New clients may perceive an incorporated business as more established and therefore professionally trustworthy. It will help provide more legitimacy, and give new clients confidence in your abilities.
- Some provinces allow you to split income with your spouse or children, also lowering your tax burden.
While your accountant can better discern if you would benefit from incorporation, you should know that it does have some drawbacks. First, it has substantial start-up costs that you may not be ready to incur. Also, incorporation will significantly increase the amount of tax preparation and paperwork you will need to perform.
Our CA4IT member firms have all of the knowledge, skills, and experience to help you decide if and when incorporating a small business is right you. Contact us for a consultation and we will help you learn more about the best tax planning strategies for your future goals.