When to incorporate my business?
I live in ON, Canada. I'm about to quit my job and start working on my saas project full-time. I don't know if I should start as a sole proprietor or incorporate it right away. I don't think I'll have any customers for at least three months. Also, I won't have any employees for at least six months. I am planning to look for investors in three to six months when I have something working.
Should I wait until my first customer or until I look for investors? When is the right time? Thanks in advance for your valuable advice.
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I'm also from Canada (Quebec), also not an accountant, but have been through this.
2ldr: I would wait as long as you can before incorporating. As soon as there is a legal entity, upkeep is required and professionals will need to be paid to help you. You can always move expenses, etc to the business later. There's a bunch of stuff you're going to want to pay people to do for you and other fees in general.
The big difference between incorporating vs operating as a sole proprietor IMO is tax games.
As a sole proprietor, all of the income for the business counts as income tax for you personally. You can still use expenses to lower your income, but depending on your income tax bracket (you've been working the first 8 months of 2021 presumably), may be higher than the corporate income tax rate.
If you incorporate (I think it cost me ~1K to do it via [https://www.corporationcentre.ca/docen/home.asp], would recommend), you can leave money in the business and pay yourself over time. You can lower your effective income by playing tax games when pulling money out (e.g. dividends, founder loans, etc). Any good accountant will give you a primer and help you with this.
I have no experience with outside funding, but when you form a corporation you structure a capitalization table and as you raise funding that table allocation will change. You'll presumably hire a lawyer and that will inform the process or you can check out venturehacks or any Canadian accelerator (e.g. District3, many others) which should have public documentation on this.
Notes on sales tax: Whether you are sole or incorp'd, you'll still need to charge sales tax. Once you cross 30K of goods sold in one year, you'll owe sales tax retroactively for that year. Be careful if you don't charge sales tax for the first 30K then cross the line, because the CRA will have questions.
Personal experience: When I left my job to go indie I had ~30K in contracts set up, so I incorporated right away (I did it via corporation centre) and so, started charging sales tax off the bat too. I could have operated as a sole proprietor, but my wife is well versed in maximizing personal wealth via a company and we were confident that we could lower my effective income by running a corp. I'm about to start the year end for my company and I'm so happy I have someone I trust to handle it.
HTH!
Also from QC :D
Do I need to charge sales tax for international customers 🤔?
Internationally, no sales tax needed.
Inter-province though, you'll need to charge the sales tax of the province the business receiving the service resides in.
For example, you live in Quebec and someone from Ontario buys your service, you charge Ontario sales tax.
Luckily there isn't separate remittance by province- it's just one amount that get remitted to the CRA (or Revenu Quebec in our case) at tax time and they figure the rest out.
Again, I'm not an accountant.
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Sweet thanks for the info ⚜️
Do you have any thoughts on using companies that take care of all the taxes for you? Like Paddle for example, or Fastspring. (I know this makes things a big more pricier in terms that they would take a percentage; and also payouts (which usually one of the main concerns).
My contracts were all invoices paid not by credit card. My invoices were larger and I'm trying to keep every penny for myself. Since my clients and I are all in Canada, moving money around is within the country cheap and easy. I see no reason to bring in a 3rd party to help there.
For collecting taxes, it was very simple since whatever invoicing software you use should calculate tax for you and add it to the invoice. Once it's paid, it's just internal accounting and remittance in your online banking.
Oh yea, I guess it makes sense in that case. Keeping things local definitely makes easier in that sense.
In California, the annual LLC tax is $800; also, if you hire a lawyer or use a service to incorporate, obviously there are those fees too. So I generally don't incorporate until I have at least $1000 in annual revenue because it doesn't make sense to spend time and money to incorporate early on when there's a high chance that the idea won't work in the first place.
Another consideration is that having an LLC (at least in the U.S.) requires additional tax filings for that tax, so I generally would avoid incorporating near the end of the year because then you have additional filings for both this year and next.
While you are unincorporated, you are a sole proprietor and still responsible for taxes on your personal return. As a sole proprietor you don't have the same legal protections as a corporation, but the legal risk of early stage saas is basically non-existant. If you think your saas is going to get you sued, then maybe incorporate at the beginning. But I would argue that if your saas is going to get you sued, maybe you shouldn't do it in the first place.
Also, you probably already know this, but if you're looking for outside investors, generally c-corp is the way to go. If you're going to bootstrap/stay private, then I'm a big fan of LLC (less paperwork/bureaucracy, single level of taxes instead of double).
Normal caveat that I'm not a lawyer and don't take this as legal advice.
Congrats on taking the leap and good luck!
I hope you mean $100,000 in annual revenue.
I agree with everything else.
Incorporating too early is a bureaucratic nightmare with little to no benefit.
No, I mean $1,000. I mean to each his own. I typically go for single member LLCs, there is very little bureaucracy involved. But if you're going c-corp, then yes that's a pita.
Doesn't it cost like $80 bucks to create an LLC in Canada? If you are able to, I'd say create it as a sort of Umbrella LLC. And then if a project becomes profitable or whatever you can create another LLC under that one for that specific project. That way you keep things a bit separate from the beginning.
I am not a financial advisor or anything, but that's probably what I'd do if I were in your shoes.
Nope. Sole-prop costs $80. LLC costs somewhere between $300 to $500.
Ohh, I didn't know you had to register a sole-prop. I'm not canadian, the $80 was something I heard someone mention in the past.
When are you required in terms of dealing with taxes, expenses, etc? When does it make sense from a legal point of view (you rather have your company go bankrupt than go personal bankrupt - or have the company sued than yourself, etc)?
In general - go build something. Then worry about the admin.
It is like when I've had an idea, researched a company name, registered the domain name, but then never got around to build anything... 😂 I would've been better of starting with building the product 🙂