By Julie Barlow on November 28, 2024
Estimated reading time: 7 minutes

Should you incorporate your freelance business?

By Julie Barlow on November 28, 2024
Estimated reading time: 7 minutes

If you’re self-employed, you might be wondering if it’s necessary to incorporate. Here’s how to incorporate a business in Canada and how much it costs.

Image by pch.vector from Freepik

Just about everyone who freelances, consults, works on contract or starts a small business in Canada eventually asks the same question: Do I need to be incorporated?

The answer is, no, you don’t need to incorporate to run a self-employed business. All you need to do is produce a good or service and send the bill to your clients or customers.

However, there are some situations where a self-employed worker may want to incorporate. Here’s what you need to know to decide what’s best for you.

Incorporating a business in Canada

Let’s look at different aspects of incorporating a freelance business or side hustle, starting with your main options for business structures:

Corporation: A legal business entity, separate from the people who own it. A corporation has some of the rights and obligations of individuals, such as the ability to enter into contracts and own property under its own name.
Sole proprietorship: A business run by one person. A sole proprietorship does not need to be incorporated, and in some cases it does not need to be registered with the government. (Check the requirements in your province or territory.)
General partnership: A business made up of two or more members. Partnerships must be registered.

What is incorporation?

Incorporating means creating a company, as opposed to being a sole proprietor or in a partnership. A company or corporation is a legal entity that is considered a legal person. It has some of the rights and obligations that are specific to individuals.

For example, the company pays its own taxes and borrows on its own behalf. In the event of a lawsuit, proceedings will first be brought against the company, not against the shareholders (in this case, you). So, incorporation may offer some protection from liability (more on this below).

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Benefits of incorporating in Canada

Self-employed Canadians often start thinking about incorporation when their business starts generating a healthy, steady income.

That’s what happened for Alain Guillot. He and his partner, Cheryl Williams, co-founded a dance school, Dance Conmigo, in Montreal in 2006. It took off quickly—by 2007, they had 200 students and were leasing space for classes and hiring teachers on contract. “As soon as your business starts to grow, people tell you to incorporate, so it seemed like the natural next step for us,” he says. (Read more about Guillot’s entrepreneurial journey.)

Some freelancers consider incorporating because their income has increased to the point where they wonder if it would be advantageous from a tax perspective.

There are potential tax benefits to incorporating. As a company owner, you can pay yourself a salary or a dividend (share of profits). In either case, you must pay personal income tax on this, which is separate from the business tax filing—once a business has been incorporated, its expenses, etc. are no longer claimed on your personal income tax. Your corporation then deducts your salary as a business expense, lowering the amount of corporate tax you will pay. Corporate tax rates are also lower.

However, in Canada, because of the principle of tax integration, you will pay the same amount of tax, whether you are incorporated or not, if you take all the profits out at the end of the year. So, being incorporated is only advantageous if you leave part of the profit inside the company (for example, to pay employees or invest in new equipment). That’s why incorporating is usually only advantageous for larger companies.

The cost to incorporate in Canada

Becoming incorporated has both direct and hidden costs. You can register in your province or territory (if that’s the only place you do business) or you can register federally (if you do business beyond your province or territory). The process of being incorporated provincially is less complicated, and therefore less costly, than incorporating federally. Note that if you incorporate federally, you must still incorporate in the province or territory where you’re based.

The federal fee to incorporate is $200, and you can pay it online. The cost of incorporating in a province or territory varies. To register a corporation in Ontario, for example, the fee is $300, plus $60 to register a business name, which you must do before you incorporate.

However, there are other costs to incorporating, and these can be considerable. “I had to hire an accountant to help me incorporate. There were a lot of government documents involved and I found it difficult to decipher what the requirements and responsibilities were,” says Guillot. “It got expensive very quickly.”

It also takes substantial time to figure out how the incorporation process works and make sure you are satisfying all the requirements. You must create a board of directors, get authorization for your company name and define a share structure, for example. “It’s not something you can do in an afternoon!” says Guillot.

If you want support throughout the process, an accountant or lawyer can help, or you can hire a company that specializes in helping businesses incorporate, such as Ownr (an RBCx company) or Incorp Pro. They offer a menu of services, starting at a few hundred dollars.

Administrating an incorporated business is also more complicated than being a sole proprietor.

Owners must file a separate income tax return for their company and produce financial audits, issue shares, keep a share register and minutes of meetings, and operate according to more stringent regulatory requirements. Again, this takes time, and you may need to seek professional help for some tasks—which of course means paying fees. Hiring an accountant to file a corporate tax return, for example, can cost $500 to $1,500.

Incorporating for legal protection

Many freelancers in Canada who opt to incorporate do so to limit their personal liability in the event of bankruptcy or a lawsuit. Being incorporated means your personal assets can’t be seized to pay debts or settle a claim. “This is the reason we decided to incorporate,” explains Guillot, adding that others repeatedly warned him about the risks of liability.

Concerns about liability also prompted Nadine Robinson, a freelance writer, marketer and keynote speaker in Sault Ste. Marie, Ont., to incorporate her business in 2012. “I was writing a book with a celebrity and was concerned about potential liabilities,” says Robinson.

You might also need to be incorporated to work with certain clients. If you’re working on major contracts for clients outside Canada, especially larger companies, they may require you to be incorporated.

At what income level should you incorporate?

For most self-employed workers running small operations, incorporating probably represents more work and cost than it’s worth.

Because of the administrative and legal costs associated with being incorporated, most accountants and tax specialists agree that it doesn’t pay off unless your annual revenue regularly exceeds $100,000. Remember, sole proprietors can deduct expenses as well, so they also benefit from tax advantages.

After being incorporated for a year, Guillot decided it wasn’t worth the trouble. He dissolved the company, and he and his partner returned to their partnership structure, which made them self-employed from a tax perspective. “I think it makes sense if the business is making enough money that you can afford to hire someone to take care of running a corporation,” he says. “It’s overwhelming for a single person who is dealing with clients all day. I was spending entire weekends doing administration!”

Nadine Robinson decided to keep her corporation, Carpe Machinam Inc. “I am still incorporated because of liability concerns, and I think it’s beneficial for me tax-treatment-wise.”

As freelance authors, we registered our business, Nadeau & Barlow, but decided against incorporating, partly because it would be a tax disadvantage for us. Canada offers generous tax credits to authors on copyright royalties, which are a big part of our earnings in some years, but the credits only apply to individuals, not companies.

But even if your business is growing, incorporating is not the only way to go. With minimal paperwork, and for a fee that ranges from $30 to $100, a self-employed worker can register their business in their province or territory. You do not need to be incorporated to hire people, and your business is still entitled to make the same tax deductions as a corporation.

Plus, you’ll have your weekends free…

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