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Incorporation vs. Self-Employed

  • Self-employed refers to an individual who operates a business as the sole proprietor, as a partner in a partnership, independent contractor, or consultant. As a self-employed writer you are personally responsible for all liability and must claim self-employment income. Being self-employed indicates that there is no separation between yourself (proprietor) and the business.
  • Incorporation is the formation of a new corporation. This is the process of creating a distinct legal entity separate from the business owners/shareholders. Unlike self-employment, by incorporating liability is transferred from the individual owner to the newly formed legal entity thus protecting the personal assets of the individual owner/ shareholder.
  • Both incorporation and self-employment have their own benefits and disadvantages. Most often a self-employed writer will not have to incorporate; however, as a self-employed writer, be aware at what point you are becoming an employee.


Benefits of Self-Employment

  • Control, you are your own boss. As a self-employed writer you are free to set your own hours and take only the jobs that best suit your personal writing style.
  • Tax deductions. As a self-employed worker you will have more opportunity for tax deductions than those who work as employees or who incorporate.
  • Variety. As a self-employed writer you are able to choose which jobs seem most compelling rather than being confined within a certain scope of writing work.


Disadvantages of Self-Employment

  • Personal financial sacrifices. As the sole-proprietor of your business you may be required at times to use your own personal savings.
  • Generally there are no benefits (health, dental and disability).**
  • Unpredictable income. As a self-employed person your income will entirely depend on your working habits and how many writing jobs you are able to secure. As with any business there will be periods when jobs are scarce and periods when you will have your choice of writing jobs. Be prepared and plan ahead.

**Under the Fairness for the Self-Employed Act, the Canadian Government has extended Employment Insurance (EI) to self-employed Canadians, recognizing their contribution to the Canadian economy and development.

Difference between Self-Employed and Employed
There is a fine line between self-employment and being employed. It is important to know whether you are self-employed or an employee as it will affect your entitlement to EI benefits, and how you are treated under other Canadian legislations.

In deciding whether a person is an employee or self-employed Revenue Canada considers the relationship between the payer and the worker and looks at:

  • Control: This refers to the ability to direct how, where, and when the work gets done.
  • Ownership of Tools and Equipment: This is the investment in the equipment required to perform a specific job.
  • Ability to Subcontract: This is the freedom to hire someone to help with a specific work task.
  • Financial Risk: The amount of financial risk that a worker is subject to, an employee faces little to no financial risk in their positions.
  • Degree of Investment
  • Opportunity for Profit
  • Terms Used in Contracting Services: There are certain phrases within a contract that will indicate whether a person is hired as an employee or a self-employed worker. “Contract of service” indicates an employer/employee relationship, whereas “contract for services” indicates self-employment.

Benefits of Incorporation

  • Protection of personal assets. Incorporation is essentially the creation of a legal entity that is separate from the business owner and therefore will be held responsible for any liability and financial obligations.
  • By incorporating you become an employee of the corporation and are paid a salary.
  • The corporation will pay the government a share of your employment taxes.
  • The greatest benefit of incorporation for Canadians is protections from liability. Because incorporation is the creation of a separate legal entity, should any legal action ever be taken against your business you are personally protected (legally and financially) and not held liable.

General Steps to Incorporation
-There are two types of incorporation in Canada, federal and provincial. Both can be used to protect your business.
    Provincial: Your Corporation will have the right to only establish and carry on their business in the province/territory that the corporation has been registered in.
    Federal: A corporation is able to product their business in all provinces and territories. Your corporation will be authorized to continue business should there already be a company doing business under a similar name.
** If you are setting up a one person or small non-reporting corporation federal incorporation most likely is not the best option, provincial incorporation will generally serve the needs of a small business.
-To file an incorporation application you will need to follow these general steps:
1)    Choose whether to incorporate federally or provincially
2)    Choose your corporate name. This will be a three component name including, a distinct portion that identifies your corporation, a description of your particular activities, a legal element that identifies the business as a corporation.
3)    Your corporate name will have to be searched and reserved.
4)    Prepare your incorporation documents including the memorandum, articles of incorporation and notice of office.
5)    File your incorporation documents and pay the incorporation fees.
 
Resources for the Self-Employed and Incorporated

    Canada Business, Government Services for Entrepreneurs (www.canadabusiness.ca/eng): Provides information on a variety of topics ranging from taxes to grants and hiring/managing staff.
    Canadian Federation of Independent Business (CFIB) (www.cfib-fcei.ca/english/index.html): Membership is required
    Canada Revenue Agency (www.cra-arc.gc.ca/menu-eng.html): Gives general information concerning taxes in Canada.
    Industry Canada (www.ic.gc.ca/eic/site/ic1.nsf/eng/home): Provides information for both businesses and consumers alike.
    Canadian Women’s Business Network (www.cdnbizwomen.com)
    Job Bank (www.jobsetc.gc.ca/eng/categories.jsp?category_id=36&crumb=36)
    Canada News Centre (http://news.gc.ca/web/article-eng.do?nid=4933319): Announcement of the Canadian government extending EI to self-employed Canadians.
    Canada’s Economic Action Plan (www.actionplan.gc.ca/eng/index.asp): Provides information on the Canadian government’s recent plans to revitalize and support the Canadian economy.
    Creatively Self-Employed (www.creativelyselfemployed.com): Provides information for writers who are self-employed along with information concerning a variety of other areas.
    “How to be a Self-Employed Writer: The Abridged Version” by Rich Gallagher (www.writersweekly.com/sucess_stories/003103_11232005.html): An article on how to earn a living working as a self-employed writer.
    “Incorporation for Writers” and “Income Tax Guide for Writers” these sources are available at the Writers’ Union of Canada and can be accessed at a cost. (www.writersunion.ca/content/writers-union-publications)
    “Tax Matters: Employee vs. Self-Employed” (www.cnmag.ca/issue-29/721-tax-matters-employee-vs-self-employed)
    Canada Revenue Agency (www.cra-arc.gc.ca/E/pub/tg/rc4110/README.html): Outlines and explains the differences between a self-employed worker and an employee.
 

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