Selling Your Experience as a Service, an Independent Incorporated Entrepreneur

When employment conditions undergo change, especially for individuals who have gained substantial years of valuable experience and knowledge, it is often a time to contemplate the option of making this experience available as a service as an incorporated independent consultant or independent contractor. 

Individuals who may have worked as an employee for a long time may be compelled to consider the alternative benefits available by offering services as an incorporated independent contractor. There are potential benefits, some costs, and several considerations to do it properly, and to maximize the benefits. 

In many cases, the ability to offer a ‘company to company’ agreement and working relationship between a contracting client business and your legal entity can make it easier to engage your services for projects, and thereby make it easier for you to generate new income. This can open up more potential revenue streams that may not be available to individuals who only want to be an employee. On the other hand, such projects do not result in long-term career advancement like an employee position. Offering your services through an incorporated entity often means more diversity of options and engagements with higher expectations, skills and deliverables. 

Diverse options create new opportunities to direct and choose your own work. This may mean the ability to work on multiple projects, or the ability to structure higher income from temporary projects that enables more time off between projects or assignments. As an independent incorporated contractor, you have the option and responsibility to direct your own work. As the entrepreneur and owner of your own business entity, you have the ability to define your expertise, experience and capabilities in a manner that enable you to focus on the business and skills that you do best, and the business that you love to do.

It is very common for independent contractors to work on projects through a third party staffing agency, payroll provider or consulting firm to manage the relationship and mitigate the risk of co-employment for the client business. This is extremely important, as the client business must not engage an incorporated entity in a direct employee working relationship or the parties involved may be subject to severe fines and penalties. Quite often, the third party agency is responsible for making sure that the incorporated contractor has satisfied the requirements as outlined by CRA (Canada Revenue Agency) and the Province. Both the incorporated contractor and the agency should be thoroughly familiar with these requirements and adhere to them.

An incorporated contractor business engages in a ‘company to company’ business relationship between the incorporated contractor and the agency or company paying for the services. This is a very important distinction. After you have registered the incorporation, you may earn a salary from the business entity that you created, but you are not an employee of the client business that pays for your services. Your company must submit invoices for services rendered and hours worked because you are not on payroll. Your invoices must include proper federal and provincial tax.

Your company is responsible for paying taxes. As an employee of your own company, you will pay yourself a salary, and pay employee income taxes on your salary. This separation between the company income and your personal income is very important. The incorporated company that you create is a real business and treated as such in all matters.

Create a separate bank account for the business, completely independent from your personal bank account. Manage the tracking of revenue to company, taxes, profit, and manage the payroll that you assign to yourself. Pay yourself to your personal account from the company account.

To obtain the company bank account, you must first register your business and obtain a tax number. There are different ways to register your business federally or provincially, and it does make a difference. We suggest consulting with trained chartered accountants and paralegal experts to give advice on incorporating properly and managing taxes properly. CPA4IT.com specializes in small businesses and independent contractors, and has paralegal and accountants on staff to support you.

You may charge for your services at an hourly rate, but you are still responsible for remitting your own taxes, and you do not qualify for employee benefits, paid sick leave, holiday, overtime or employee related statutory benefits from the client business that contracts the services of your company. You are an employee of your own company, and your company cannot bill the client business for sick leave, vacation or holidays. To compensate for this, independent incorporated contractors typically charge a higher hourly rate as compared to similar job responsibilities for someone who is an employee status. For an employee, the employer remits the taxes and accrues vacation and holiday. As an independent contractor, you charge a higher hourly fee, which enables you to remit your own taxes, and accrue holiday and vacation from within your incorporated entity. 

Maintaining the separation between the company you created and your personal income enables you to manage some important business related expenses. A self-employed independent contractor may be eligible to claim valid work related expenses to operate the business working from home. This may include telephone, internet, a portion of the utilities, business related vehicle costs, meals, equipment and items in accordance with CRA guidelines.

Eligible expenses claimed before calculating the base salary means deducting the expense before calculating income tax. As an example, for an employee, the employer withholds taxes from payroll and the employee pays for equipment and utilities from what remains of the “take-home-pay”. By contrast, an independent contractor may pay for equipment and utilities before calculating personal income, and assess tax on the reduced amount of income after eligible expenses are already paid. This distinction can be substantial, and it is best to review eligibility and estimates with an accountant.

An independent incorporated company also needs to have insurance. The most common insurance includes liability, errors and omissions. An employer has insurance to cover employees, but an independent incorporated contractor does not receive employee coverage, so you must obtain your own. Your company has liability and responsibilities, so you need to get insurance to mitigate your risk. The good news is that this insurance helps to demonstrate that you are treating your company as a real business, and it is a tax-deductible expense.

Owning your own business, and becoming an employee of your own business, means paying yourself a salary. Each year your company earns income for your services, and every year you pay yourself from your company. If you find that your company is making more money than you want or need to pay your own personal income, then you may want to investigate options for your company to invest a portion of the income into tax-deferred investments or annuities. Ask your accountant about opportunities for investments and the benefits of compound interest. Compound interest enables your company to reinvest interest, thereby earning interest on interest.

Some of the critical considerations when contemplating the benefits of offering your services through your own independent incorporated entity are as follows:

• There is a cost to register and maintain your corporation. You must maintain accurate books and filings. It is best to invest in paralegal services and accounting services to do it properly, and to remit accurate taxes. 
• You will need a tax number for your business.
• Once you are incorporated and have a tax number, you should have a bank account for your business that is separate from your personal bank account. 
• Each project or engagement must have a written Contract between the party contracting the work and your incorporated business. It is a ‘company to company’ Agreement, and not an Employment Agreement. The language of your Contract is very important.
• Ability to control over where and how you work
• Ability to hire assistants or sub-contract work
• Your company may need to provide equipment or tools, some of which may be business expenses
• Your company will have financial risk and the opportunity to profit from the work. Obtain proper insurance to address liability, errors and omissions. Consider investment options and compound interest to maximize your profits.
• You are responsible for the investments and management of your company and projects. 
• You must submit invoices for your services, and your invoices must include the proper tax. Payment comes from invoices, not from a recurring salary. Payment terms for invoices may vary based on project, engagement or contracting entity.
• You are responsible for remitting your own taxes for your company and separately for your personal income as an employee of your own company. 

If you are contemplating offering your services through your company as a consultant, then be prepared for marketing expenses and allocate a significant portion of your time for continuous promotion of your experience, capabilities and offerings. As an alternative, there are many options to make your services available through third party staffing agencies and consulting organizations. Working with an agency or consulting firm minimizes the necessity and expense to market and promote your own services, and creates more opportunities for you to engage through your company entity faster and more frequently. Being responsible for the direction of your own company means that you can do both, you can market your company, create your own website, build your own brand and accept projects and contracted engagements through agencies and consulting firms. 

Once you have incorporated your own company, you are captain of your own ship. As the captain, you have many responsibilities for managing finances, tax, contracts, insurance and invoicing. A good captain does not need to do all of the chores himself or herself. Rather, engage with paralegal and accountants to do things properly and obtain the best results. Hire the experts for their services in accounting, tax and contracts, and free your time and attention to enable others to hire you for your expert services. 

There are many benefits to creating your own enterprise. Among these benefits are several considerations with managing your income, investments and taxes properly. Similarly, there can be significant risks to independent contractors or hiring entities that do not understand or adhere to the guidelines. Guidelines and rules for doing business with incorporated small business entrepreneurs vary by country and region. Please do not be annoyed or frustrated by working with companies that request articles of incorporation, copies of insurance, and contracting agencies that conduct business in a manner that adheres to CRA guidelines, because these companies are actually protecting you as well as the client businesses. Setting up and operating as in independent incorporated entity can be very exciting and lucrative when done properly.

Words of Wisdom

“A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” – Winston Churchill

“Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do.” – Steve Jobs

“I knew that if I failed I wouldn’t regret that, but I knew the one thing I might regret is not trying.” – Jeff Bezos

About the Author: John Mehrmann is President of Belcan Canada Inc., an IT and Engineering staffing and recruiting company that is dedicated to augmenting and empowering the internal teams at client businesses. John is author of The Trusted Advocate: Accelerate Success with Authenticity and Integrity, and contributed to 101 Great Ways to Improve Your Life Vol 3, and Leading Loyalty: Cracking the Code to Customer Devotion.