Choosing to be a Sole Proprietor versus Incorporation for Independent Contractors
As an IT contractor, you may be wondering if it’s worth the expense and extra paper work to get yourself incorporated. IT all depends on your personal situation and where you are at in your career.
Many IT workers prefer to work in contracts rather than taking on full-time permanent jobs because they love the freedom of moving from contract to contract. That’s not the only benefit of contract work – often the money is better than you can get in a permanent role, or as a sole proprietor.
The freedom of being an independent contractor brings risk because you need to line up a new contract when the current one ends. But if you have a hot skill set and related experience, headhunters like Stafflink will line up new contracts for you.
Getting incorporated might be be a good idea. Or maybe not. Let’s explore the pros and cons.
Pros and Cons of Sole Proprietor versus Incorporation
It can cost $1000 or more to incorporate yourself as a business and it brings some extra work for you to manage your taxes. Is it worth the extra trouble and expense?
The two most common types of personal businesses that we see with the IT contractors that work for Stafflink are Sole Proprietorship and Incorporated.
Tip: You can change the legal structure of your business as it grows. Many small businesses start out as a sole proprietors or partnerships and become incorporated as the business grows.
Here are some things to consider when you are choosing what’s right for you:
One of the biggest advantages of working as a sole proprietor versus incorporation is that setting up and administering the business is comparatively easy and inexpensive. If you want to get incorporated, it costs $1000 or more depending on who you hire to assist you with the process.
One of the main advantages of incorporation is limited liability. A sole proprietor assumes all of the liability for their company. As a sole proprietor your personal assets, such as your house and car can be seized. As an incorporated contractor, you a shareholder in a corporation and you are not responsible for the debts of the corporation unless you have given a personal guarantee.
Corporations Carry On
Unlike a sole proprietorship, a corporation has an unlimited life span. The corporation will continue to exist even if the shareholders die or leave the business.
Lack of flexibility with income taxes is one of the disavantages of sole proprietorship versus incorporation. Income tax rates are lower for corporations than for the personal income received by sole proprietors. Using tax planning, the tax burden can be reduced by earning income through your corporation as an incorporated contractors, due to the lower corporate tax rates.
Income Control and Tax Deferral
If you are an incorporated contractor, you have options to determine when you personally receive income from your corporation. Being incorporated allows you to report your income at a time when you will pay less tax. You may be able to realize tax savings if you receive your income at a time when you are in a lower tax bracket or if taxes have fallen.
With a corporation, there exists the opportunity to pay shareholders salary, dividends or a combination of the two. Your spouse and/or children could be shareholders in your corporation giving you the opportunity to redistribute corporate income to family members with the lower incomes taxed at a lower rate.
Some people perceive corporations as being more stable than sole proprietorships. Having Ltd., Inc., or Corp. as part of your company’s name may help you attract more contracts.
Less paperwork is one of the big advantages of sole proprientorshop versurs incorporation. Having a corporation brings with it extra accounting and paperwork. Corporations must maintain minute books and corporate bylaws. Other required corporate documents are register of directors, the share register and the transfer register.
Non-Calendar Year Ends
Corporations have the ability to choose their year end and not be restricted to a calendar year-end as you are with a Sole Proprietorship. This opens up the possibility of bonus deferrals. Choosing a year-end may be better for year-end paperwork filing should your business be busy at the end of the calendar year. By incorporating you can choose to have your year-end fall during a slow period.
You just read some of the advantages and disadvantages of incorporation versus sole proprietorship but what’s the bottom line? Is getting incorporated worth it or not? Before you decide, make sure to discuss your personal situation with your accountant and lawyer.