It’s here. Tax season. Most freelancers and small business owners are getting ready to face their most dreaded task: filing their taxes. If you’re just getting started in your freelance career, or even if you’ve been at this for a while, it’s helpful to know how the legal structure of your business can impact your taxes. Being aware of this can help you ensure that you’re managing your money in a tax-efficient way! Let’s take a look at the three main business structures and what important factors you’ll need to consider for each:
As a sole proprietor, you are able to operate your business under your own legal name, without having to register the company as a separate legal entity. That also means that your personal assets are liable to account for your business, should anything go wrong. This is the most common structure for freelancers and solopreneurs in Canada, and is often taxed at 40-45% of net revenue. However, just because the business is registered under your personal name, doesn’t mean you should necessarily keep your business expenses coming out of your personal chequing account. We’ll discuss this in more detail in the next section.
Similar to sole proprietors, partnerships have two or more proprietors who would be legally liable for the business. We highly recommend having written agreements between partners, accounting for how profits, workflow and responsibilities will be divided between all parties involved.
An incorporated business is considered a completely separate legal entity. It is not tied to the owner’s personal assets. They require a board of directors. Corporations are audited far more frequently, and are often taxed at a much lower rate than sole proprietors, around 20-25% of their net revenue.
While tax season is dreaded by most business owners and freelancers, it doesn’t have to be. Being prepared with a clear understanding of how your business structure impacts your taxes can help you manage your money in a tax-efficient way. We hope this helps make tax season a breeze!