As an independent contractor you have the option of being a Sole Proprietor or an owner of a Partnership. A friend of mine recently became a contractor, and he had the option of registering as a business and billing as a business.
My friend and I decided to do some investigation to understand how this worked and what some of the processes involved are.
- First Step, you must understand the benefits of registering as a sole proprietorship. This is the easiest form of business type to setup, inexpensive, lower reporting burdens, tax advantage if business is not doing well. One of the main disadvantage is that there is no separation of self and business. However, for most contractors this is not a worry point.
- For my friend, we wanted to have the option of him being able to hire employees if required. I didn’t realize this was possible even in a sole proprietorship. This structure simply means there is one owner, however that owner can have employees.
- If you want to have employees you need to setup a payroll account, and remit CPP and EI payments to the government as an employer and the employee portion as well. In my friend’s case he wanted to setup the business structure so he can do profit sharing with one of his family members. If you have a family member who can perform tasks for your business, you can employ them and pay them a salary. This will be considered an expense, and will reduce the amount of net income you will receive. If your family member is in a lower tax bracket compared to yourself, it will reduce the amount of tax that you have to pay. However, you need to keep track of payroll and the deductions that must be paid to the government as an employer and from your employee’s contribution. We decided it might be cheaper in terms of effort, and % of overall deductions to set the structure up as a general partnership.
- A general partnership is like a sole proprietorship but with multiple owners. There is no separation of the partner’s personal assets/liabilities with that of the company. You can always set up a limited partnership that can help increase this separation. Since, we were interested in general partnership only, I will focus on general partnership only.
- The main reason we wanted to set this business as a partnership is to do profit splitting, and maximize the tax savings from profit splitting. Since net income from your business in a partnership is added to the income of the partners, it makes sense to pass on more of the profits from the business to a partner with the lower tax bracket (if both partners are from the same family). This is a simpler way of tax saving compared to employing a family member. In order to pay more of the profit to the family member with the lower tax bracket, they need to be setup as the partner with a higher percentage of the ownership. You can have a partnership agreement drafted. It can be an informal document or a document created with the help of a lawyer.
- Use this form to register for a business name and to register the business as a partnership.
- Form: https://www.ibsa.serviceontario.ca/ibsa/servlet/com.visionmax.servlet.CommandServlet?command=screenflownoscript&screenid=26&_ga=1.255863563.1682117583.1456458425
- For a partnership he needs to choose the type as partnership and as a general partnership in the form above.
- My friend wanted to register a business as a partnership given its simplicity of profit transfer for maximum tax saving. It costs $60 to register a Business Name in Ontario and is valid for 5 years.
- In addition to a business name my friend requires a GST/HST account.
- http://www.cra-arc.gc.ca/tx/bsnss/tpcs/bn-ne/bfr-eng.html. This link has information on the different type of accounts a business owner may require.
- The general guideline for GST/HST account is that you need one if your business will be generating more than $30k a year. In my friend’s case it will be as such he needs to register for GST/HST. GST Account registration is part of your business registration. http://www.cra-arc.gc.ca/tx/bsnss/tpcs/bn-ne/bro-ide/menu-eng.html
- Guidelines for how to charge your customers GST/HST : http://www.cra-arc.gc.ca/tx/bsnss/tpcs/gst-tps/gnrl/stps/cllct-eng.html
Day to Day Business
- Now that his business is setup, my friend needs to create monthly invoices including a GST/HST portion and bill his client.
- He needs to keep track of the GST/HST payment and remit that to the government of Canada.
- He needs to track all his business expenses and book them against the revenue he receives from his client.
- He needs to do yearly taxes for himself and his partner. This can be done in combination of personal taxes.