What Is the Right Legal Structure for My IT Business?

Finding The Right Structure For Your IT Business – Sole Proprietor, LLC, or S Corp

As a small IT business owner in Canada, you’ll have an abundance of decisions to make. Some of those decisions will prove to be more important than you could ever imagine. If you don’t start with a solid foundation, there is a good chance that you’re going to run into serious problems and your business will suffer. Without a solid foundation, your business will be destined to fail. When it comes to choosing a business structure, you need to start by learning more about all of your options.

Should you choose a sole proprietor, LLC, or S corporation? What are the differences between these options? Within this guide, you’re going to learn more about each so you can easily find the one that is going to work best for your company.

Understanding A Sole Proprietor

First and foremost, you’ll want to learn more about a sole proprietorship. This is a unique business structure that will work for a lot of small IT businesses in Canada. If you’re working for yourself and are self-employed, you’re likely dealing with a sole proprietorship. You likely haven’t filed any paperwork but you’re still running this type of business. In most cases, you don’t need to file paperwork or register your sole proprietor business. Nevertheless, this is the structure that you’re working with. Your business fits the qualifications so this is a good choice for you.

If you’re performing “work for hire”, you’re running a sole proprietorship. Whether you’re a freelance writer or photographer, you’re getting paid and you’ll eventually need to pay taxes on those earnings. If your IT business doesn’t have any employees, you are likely running a sole proprietorship. You deal with everything on your own. This means that you’re handling the work, profits, losses, and expenses. Everything will be reported on your individual tax return.

A sole proprietor is a pass-through entity meaning your company’s profits will be passed on to you. Your business earnings and losses will be reported on your individual tax return. You likely won’t file a tax return for your business since everything is reported on your individual tax return. This is very convenient because you don’t have to worry about filing more paperwork. Also, you can pay taxes as an individual instead of having to pay corporate taxes.

Since you and the business are one entity, you may save money. While this business structure offers numerous perks, it comes with some downfalls as well. For instance, you’re going to face bigger liabilities as the owner of a sole proprietor. Unfortunately, there are no legal lines between your assets and the assets of your business. This means that you’re going to face bigger risks if your company gets into trouble.

A debt collector may be able to come after your personal assets when trying to collect a business debt. If a lawsuit is filed against your business, the risks will be drastic. The IT field poses less risk than some of the others but you still need to be aware of these risks. Be cautious. If you’re worried about protecting your business, you may want to stay away from this structure.

Lower Risks With A Limited Liability

Canadian business owners will want to do everything they can to protect themselves and their assets. With that being said, you can reduce your risks using various techniques. One of the best ways to solve this problem is by taking advantage of a limited liability company or an LLC. Most companies will be served better by a limited liability company. However, you’ll need to file more paperwork to get things set up and running. You’ll also have to pay certain fees to set up a limited liability company in Canada. The good news is that you’re not going to have many issues in this category.

When it comes to the paperwork, it is generally straightforward and easy to deal with. Furthermore, the fees aren’t too expensive so you’ll want to take advantage of this business structure. If you’ve worked as a sole proprietor for several years, you’ll be comfortable with an LLC because they’re pass-through entities too. This means that you’ll be able to report your business income on your individual tax return. You likely won’t have to file another tax return for your business.

This makes things easier since you won’t need to file two returns at the end of the year. The biggest benefit associated with an LLC is that you can protect your personal assets. They’re going to be separated from your business assets. If you get sued, a debt collector may try to take your money. Well, you won’t have to worry about the debt collector coming for your personal assets. Since you’re running an LLC, the debt collector won’t be able to take your personal assets.

LLC structures are best for most businesses because they offer the best tax benefits. With an LLC, you’ll receive the best of both worlds. You’ll receive protection because you won’t have to worry about losing your personal assets. Also, you’ll be able to file your business taxes alongside your personal taxes.

An S Corporation

An S corporation can be called an S corp. This will prove to be a very popular choice for small tech companies across the country of Canada. Using an S corporation is one of the best ways to give your business a solid foundation for success. With an S corp, you’ll be able to pass your business’s income, losses, credits, and deductions to shareholders. For instance, you can pass your profits and losses to yourself and another business partner. If you decide to choose this option for your business, you’ll want to put yourself on the company’s payroll by paying yourself a salary.

Once you’ve done that, you’ll have to deduct and pay all payroll taxes. You’ll need to pay all payroll taxes that are required by the Canadian government. Once you’ve done that, there is a chance that you’ll have profits left behind. If this is the case, you can transfer those profits to owners in the form of dividends. Those dividends are usually taxed at a lower rate than what you would expect from an LLC or sole proprietorship. You won’t have to deal with double taxation.

You can avoid that by ensuring that one tax report is filed by personal shareholders of the company. This is one of the biggest benefits S corporations have over sole proprietorships. While the S corp is very helpful, it has some negatives too. For instance, you’ll find out very quickly that it is going to cost a lot more to create an S corporation for your small tech business.

It might be too expensive for many Canadian tech businesses especially those just getting started. If you’re trying to save money, you should stick with one of the alternative choices until you’re ready to move forward. Furthermore, you will be required to fill out a lot of paperwork and that can be too much for some people. If you don’t follow strict guidelines, there is a risk that you’re going to lose your S corporation.

If you believe an S corporation is right for your business, you should choose one and follow the rules carefully. Make sure the paperwork is submitted on time every year or you may run into problems along the way.

Limiting Your Company’s Exposure

Ultimately, choosing the right business structure for your company can make a huge difference. If you make the wrong decision, there is a good chance that you’re going to run into problems sooner rather than later. With that being said, you should go above and beyond to choose a structure that works exceptionally well for your lifestyle and business. You’ll also want to think about protecting your investment by acquiring IT insurance. All IT businesses operating in the country of Canada face numerous risks daily. Operating without insurance could put you at great risk and you don’t want that.

With insurance, you can protect your firm from various problems including lawsuits from angry customers. When signing up for insurance, you’ll want to obtain general liability insurance, E&O insurance, and so much more. The world of insurance may seem daunting and confusing for the average Canadian business owner. This is why you should work with an insurance professional. ProfessionalsCoverage can help.

With their assistance, you’ll be able to find a good insurance broker in your area so you can purchase a business owner’s policy for your business immediately. Don’t delay because a BOP will provide you with general liability insurance and commercial property insurance.

Use Free Quotes

While business insurance is a necessity for your Canadian business owners, you have to understand that it is going to be costly. Therefore, you’ll want to know how much you’re going to spend in advance. To do that, you should take the time to obtain free quotes from multiple insurance companies in Canada. Once you’ve done that, you can compare quotes and find the best plan for your business.

Need coverage in effect? Compare the market!

Helpful resources for IT professionals and their companies

Other types of IT Businesses we insure:

If your specializing is not mentioned below, have no worries. Our insurance markets can provide liability coverage for the majority of information technology related businesses.