In my last article, I wrote about the common types of IT contracts you might come across if you decide to become a contractor.
In today's article, I want to address a very popular question asked by developers as they start their contracting journey. There are lots of articles discussing the accounting and tax benefits of incorporating, but not so much in regards to the 'developer' aspect of such a decision.
Many 'enterprise' organizations and agencies require IT contractors to be incorporated and will not consider any non-incorporated candidate (regardless of skill or experience). Businesses do this for a number of legal and tax reasons.
Many people feel this is an unfair practice to those who do not want to go through the costly process of incorporation. So I wanted to explain one of the main reasons why organizations require incorporation.
In some countries/states, the onus is the business to prove the 'contractor' status if a contractor claims employee status against the business. In the IT world, where projects are staffed by a blend of contractors and employees, this distinction can be difficult.
The naive argument were one can simply justify contractor status based on the wording of the contract is incorrect. Today, many tax organizations (IRS, CRA), instead, look closely on how the 'contractor' is being used and the true relationship between them - rather than the actual use of the word (‘contractor’) in the contract itself.
Because of this, organizations want a clear business-to-business (B2B) relationship between itself and contractors. In the eyes of the tax-man, a corp-to-corp contract solidifies the B2B relationship(from the organization’s point of view), better than if it were to enter into a contract with an individual person.
Hence, by incorporating your business, you will have access to many new enterprise clients (whom will probably be your most lucrative). That being said, many organizations will still interview non-incorporated candidates and provide a short time window for a non-incorporated person to seek incorporation if they are hired.
Developers can use their corporation for business related purchases such as conferences, office supplies, and training etc. Having a business opens the possibility of having access to a network of B2B suppliers, better customer service, and wholesale prices. Many of these B2B vendors require proof of business activity in order to deal with them. Having a corporation significantly reduces this proof burden.
Generally speaking, as an employee, you are shielded from any personal liability for honest errors you might make, but as a business, you can be liable for these bugs and the potential costs incurred by them.
Incorporating your business can provide some protection of your personal assets (your house, car, etc). Keep in mind, it's not a total shield, as you are still (in most cases) acting as a director of the corporation - whom may personally responsible for certain liabilities of the corporation.
Are you a contractor and did you decide to incorporate? What made you do so and was it a good decision? I would love to hear your feedback. Comment below or follow me at @JennrmillerDev on Twitter or if you would like to read more, also consider following @CanosieLabs.
On my next article, I will share more about expectations as a contractor and how it differs from being an employee.