Brief Note on Employee vs. Sole Proprietorship vs. Incorporation

– Sole prop vs. incorporated:

Sole prop. is cheaper, more simple, less paperwork. But doesn’t come with the limited liability, tax deferral, share issue potential, and income flexibility (pay yourself mileage instead of using direct vehicle expense writeoffs, income splitting, tax deferral, can pay salary or dividends, etc.) of a corporation. Some industries will also (usually) only let you get WCB if you’re incorporated, like trucking in my case. See that a lot in trades where liability is potentially a larger issue.

Taxes, paperwork, and record keeping are a lot more complicated with a corporation. The salary vs. dividend option that opens up though allows you to choose whether you want to pay into EI and CPP, and use personal tax credits. Dividends are also taxed at a more favourable rate once you’re in the upper tax brackets.

Generally though most people want to be incorporated for limited liability (separate personal assets from business), defer tax, and to income split.

In my case I had to be incorporated to do business, as clients required proof of WCB, and I couldn’t have WCB for trucking without being incorporated. I also am in upper tax brackets so the beneficial income splitting potential is there, and have almost 0 personal tax credits outside education, so the corporate route made more sense.

– Agencies

You’ll often make less money since the agency takes their cut from the pay the customer is budgeting for you. But it’s a lot less legwork to look for work. For industries where there is a lot of work and you’re a hustler (like my case), there is little incentive to find an agency. Obviously for more white collar roles where work is more “sticky” and you don’t know the right people otherwise, an agency may help.

– Contractor vs. employee

As an employee you have your employer paying into your vacation pay (+4+% or 2 weeks+/yr), benefits, WCB, 1/2 of your CPP, and a portion of your EI contributions for you, and doing your employment paperwork. Though in reality employers embed this cost into their budgets, so you make less money. You also have few tax writeoffs in comparison to doing business. Contractors also have less rights than employees, though they are more flexible. If my client pisses me off, I can just take off- and the cost to the client is lower than if I were an employee, as there are less formalities involved. Finding another client is easier than finding another employer, as the process of it getting me work is less formal and expensive. In essence the additional net income you make from being a contractor is the compensation you take for the additional risk.

When you try to get credit, banks shun business owners so they will give you a harder time. In most cases you have to show 2 past Notice of Assessments as proof of income, and a record of doing work in the same industry. So you might find yourself waiting <=2+ years just to get a piece of credit you need. Income splitting will also dramatically crush your chances, as you’re reducing your income. Business writeoffs also work against your net income for credit purposes, so you may find yourself in situations where you’re purposely paying the govt. more tax just to show a higher net income (Line 150) for qualification purposes- negating the advantage of being a contractor.

Lenders often prefer the salaried employee who usually doesn’t ever make money, but consistently enough in a satisfactory amount, to enslave indefinitely in debt. Make enough to keep paying the bank, but not enough to stop paying the bank. In strict financial perspective, it is lower risk. From a psychological perspective, the typical bank employee often is usually a finance/economics/BA student who once had a dream of being a “glorious” investment banker or had other similar big dreams, and sees risk takers (business owners and investors) as sinners as they feel they “know the reality” of the financial world. Sometimes it’s just out of strict jealousy as they know they’re too fearful to take the risks themselves and would hate to see you succeed. Many of them actually don’t want to be there, but are there just for the perceived stability of a currently consistent employee paycheque. So, it’s not uncommon to run into some douche underwriter that thinks it’s your Mom and will give you grief.

The difference in getting investment funds can sometimes mean getting into a potential investment or not, and hence there’s the opportunity cost of losing out on such opportunity. Usually it’s real estate, as lenders are becoming stickier about it year after year lately.
e.g. You may save $10,000 over a year in tax from being a contractor, but you may lose out on an investment opportunity that earns you $25,000 over that year.