The path towards self-employment
If you've ever dreamed of quitting your day job and opening up your own business, you're definitely not alone. About 170,000 Albertans identify themselves as self-employed. Starting up a small business instead of "working for the man" has gained much popularity in recent years, particularly with the under 30 crowd. The two biggest sectors for self-employment are the construction industry (18%) and professional/technical services (17%), such as engineering and consulting.
Almost 60% of self-employed Albertans are incorporated, much higher than the Canadian national average. On paper, employees have a higher annual income than those self-employed. However, self-employed people report a higher net worth when the value of their companies are taken into account.
If you've ever considered becoming self-employed, here are some things you need to think about:
- Self-employed people get paid per contract or project, which is very different than having a steady paycheque deposited into your bank account every second Friday. Your company's earnings now depends on your ability to score that next contract. And you may not be paid exactly on time. You need to be able to go without an income stream for a short period of time.
- You'll have to pay for own health, life and/or disability insurance, or opt to go without. Although health and life insurance are not terribly expensive for healthy individuals, disability insurance can be quite costly. If you don't have disability insurance, then income may be reduced zero in the event of an accident or illness. That's something you need to think about if you're the sole provider for your family or paying a hefty mortgage.
- Say good-bye to the defined pension plans, so you are responsible for your own retirement planning (as a side note, a majority of Albertans who work in the private sector don't have a corporate pension either, so this may not be a huge deterrent).
- Depending on the nature of your work, your contract can be cancelled in as little as 24 hours. That's very different than being an employee, where companies generally pay out a termination severance, or at the very least provide you with 2 weeks notice. If you're the type of person that lives paycheque to paycheque, this could be a big drawback.
On the flip side, there are a lot of tangible and not-so-tangible benefits to being self-employed:
- The tax structure for small businesses is a lot more favourable than employees. As a business owner, you can deduct operating expenses such as mileage, a home office, your cell phone or part of your internet bill. Employees have no work-related deductions (with the exception of expenses for relocating for a new job).
- You have the option of leaving business income within your company (to grow your business), pay out a dividend and/or pay out a regular income. Dividend and income payouts can also be deferred to future years. That gives you the flexibility of optimizing your tax rates according to your personal circumstances.
- Self-employed people generally report higher job satisfaction, likely due to the feeling of being more autonomous, being able to manage their own time and having the flexibility to choose their assignments. Oddly enough, self-employed people report having better work/life balance despite actually working more hours than the average employee!
Incorporating your own business in Alberta is easier and less expensive than you think. Here's our 7 step guide to becoming the CEO of your own corporation:
1. Come up with a name for your company
- Make sure your company name is easy to spell and "Google-able". You may not think you need a website at this point, but you might change your mind down the road. Also, avoid being too generic (like "Bob's Consulting Services"). An overly common or complex name might be difficult for people to find on the internet or social media sites.
- Make sure you don't use the term "engineering" (like "Smith's Engineering") unless you plan to actually get a permit to practice engineering. Engineering titles are quite closely regulated in Alberta.
- Do a quick internet search to make sure your name isn't already taken.
2. Register your name at any Alberta Registry
- Registries charge a fee to check your selected name through the NUANS Corporate Name database. You're allowed to check 3 names at a time, so its a good idea to have a back-up name in case your original selection is already taken.
- Once the name is confirmed, you are now ready to register your corporation.
3. Determine where your office will be located
- Your company needs a physical address. This would typically be a home office or could even be your accountant's office. Ideally, this should be where your book-keeping records and invoices will be kept.
- You can also have a separate mailing address, if required, such as PO box.
4. Decide on a share structure
Each corporation needs to have at least one director, each owning a portion of the shares in the corporation. In Alberta, at least 50% of the directors must be residents of Canada.
- Decide on the number of directors and whether they will have voting or non-voting shares. If you're the only owner, then you're the only director and own 100% of the shares. If you plan to distribute dividends with your family, then you might want to add them as directors (such as your spouse or children) without voting rights.
- You can also partner up with another entrepreneur. Note that all directors are part owners of the company. In the event of a dissolution of the partnership (or a divorce, if your spouse is part owner), you will have to buy out your partner's shares or dissolve the company. So that's something to think about if your business has multiple directors.
- Decide on the number of shares, share distribution and type. If you're the sole proprietor, then you would own 100% of the Class A shares, for example 100 shares. If you have an equal partner, then you and your partner might each own 50 Class A shares. If you have family members on the team of directors, then you need to think about the share and class split. It might be a good idea to give your spouse Class B shares. That allows you to pay out dividends at different rates for each director.
5. Set up an office
- Most corporations start with a small home office. If you can dedicate a space in your home, that would be ideal. Keep track of costs for your home office (such as phone, internet, fraction of rent costs, etc.) as these can all be used as operating expenses.
- Allocate capital to your new company. Capital is defined as anything worth more than $100, such as furniture, computers, printer, cell phone, or even software. You can only deduct 50% of your capital per year as depreciation costs. You can also "sell" a privately owned item to your corporation at a reasonable price.
6. Open a business account and track your expenses
- It's really important to keep your personal finances separate from your business. All funds that flow in and out of your business account need to be itemized and accounted for.
- Keep a detailed list of all operating and capital expenses. An Excel spreadsheet should be good enough, but there are plenty of accounting softwares on the market, or even hire a book-keeper if you want to outsource.
- Be careful not to go nuts on expense deductions. As a general rule, they should be no more than 10-15% of your company's income. Extraordinarily high expenses will be red-flagged over at Revenue Canada.
7. Get insurance for your new company
There are several types of insurance you need to consider getting for your company and its employees:
- WCB Insurance: Required if you or your employees are working on a job site or even a third party office. WCB covers workplace accidents, including office mishaps (such as carpel tunnel and back strain) and is mandatory for anyone doing any type of field work. If you're working out of your home office, WCB is optional. Again, if you don't pay, you can't collect.
- Business Insurance: At least $1,000,000 in business liability insurance is recommended. This covers vehicle accidents on your way to/from a job site or place of work (even if that's just another office). Business insurance also covers your home office and equipment (such as furniture, laptop or business cellphone) and can also cover loss of employment income in the event of fire.
- Error & Omissions Insurance (E&O): Recommended for anyone doing any type of engineering or architectural work that requires placing their seal on technical drawings or reports. E&O insurance will cover lawsuits that arise from calculations errors or unexpected failures. Note that E&O insurance can be quite expensive. So if you're subcontracting your services to another engineering firm, make sure their E&O insurance covers subcontractors. If you're a consultant providing general advice or technical assessments, a disclaimer at the end of your report or deliverable might be good enough.
Congrats! You're new company is now up and running. Now comes the hard part . . . actually getting a contract! Here are some tips to help get your new business off the ground:
Web-hosting sites like GoDaddy, WIX and SquareSpace offer high-quality website development and hosting for as little as $8 a month. A website lets others know about your expertise, work history and services offered. It even gives you a place to put examples of your work and references.
Get the word out to your network of friends and former co-workers that you offer whatever products or services. Get some business cards, shine up your shoes and head out to trade shows, group meet-ups, networking events and conferences.
Use services like LinkedIn and Twitter to stay connected to your network of peers. This is a good place to post information related to your business or share links from third party sites.
Be sure to keep your professional and person lives separate. Resist the temptation to post religious, political and family updates on your corporate media site. If you're going to use Facebook or Twitter, consider setting up a separate account for your corporation.
Given the current economic conditions in Alberta these days, it might be a good idea to cater your business plan towards cost-savings initiatives. Tons of money is being poured into reducing downtime and lowering greenhouse gas emissions. You might even be able to get SR&ED tax credits for research work or cutting-edge technology development.
It's also a really good idea to have a business plan. List out ideas for generating revenue and what your expenses might look like over the next few years. Organizations such as the Business Development Bank of Canada (DBC) specialize in small business loans for new entrepreneurs and those looking to grow their small business.
If your company is technically inclined, consider writing technical papers or doing presentations at conferences, maybe even writing up editorials for your local newspaper. Unemployed electrician? Considering partnering up with other electricians and bid on small electrical contracts in your community. Remember that a lot of skills are transferable to other industries, particularly those working in technical or trades-related fields. Some of the red hot sectors right now are residential and commercial construction, government and home renovation.
Getting your small business off the ground may seem impossible at first, but remember, many of the world's largest corporations started out as a one-man-show in mom's basement. Everyone needs to start somewhere. Stay positive, work hard and get the word out that you're open for business!