creative briefing

This post is written by guest-blogger Kevin Huynh. Kevin is the Finance Director of a Toronto-based creative marketing firm and knows a thing or two about the formalities of setting up a creative practice.

An entrepreneur has many roles; one of the hardest ones is refining the skills in developing into a good business person – an aspect often overlooked. You’re a great designer, developer, and clients love your work, so my hope is to help increase your business acumen to help you manage your emerging company better, and eventually you’ll be a well-rounded, business-savvy creative entrepreneur.

An important topic to examine in doing this is incorporation. The term is tossed around a lot, but very few freelancers actually have a solid understanding of its background, process, and significance. At one point or another, freelancers new to the field will surely cross paths with the question “should I incorporate?” so it is the purpose of this 3-part series to shed some light on the topic, and hopefully answer this simple but important question.

What is incorporation?

Inc., Corp. and Ltd. These abbreviations that follow a company’s name all mean the same thing: the business is a corporation. Similarly, the act of incorporating simply means registering a business to become a corporation. But what does it mean for your business?

Most freelancers (sole proprietors) don’t need to incorporate their business, nor are they required to. However, there are a number of advantages of incorporating along with its fair share of disadvantages. I’ll start by outlining these pros and cons, and in Part 2, I’ll take you through my creative agency’s reasons for taking this extra step. And hopefully, by the end of it, you’ll get a sense of whether incorporating is right for your business.

There is a plethora of resources out there that discuss the ins and outs of incorporating that probably do a much better job of explaining it than I can, so I will simply focus on the main pros and cons centered on freelancers and those establishing a creative practice. In other words, these are the advantages and disadvantages that you should be most concerned about.

A few things to note:

1. First off, you don’t have to be a corporation to prove you’re a “real” company. There are many successful businesses that are sole proprietorships or partnerships, because that’s what works for them. If you’ve got yourself a list of services, a client base and a name for your business then it’s a company!
    
2. Incorporating your business simply means creating a separate entity. An imaginary person if you will. Yes, you may be the heart and soul of your company, but legally, it’s its own individual.
    
3. The experiences are based from a Canadian perspective. Details will vary slightly for other regions.
    

Main Advantages of Incorporating

There are two main reasons why you should consider incorporating your creative practice: limited liability and tax benefits.

Limited Liability
Simply speaking, you can only lose as much money as you put into the business. Your house, car and other assets are not at risk if the company becomes insolvent (i.e. broke). Creditors (people that are owed money) have claim only to the assets owned by the company. Caveat: In small businesses, shareholders and directors may be held responsible in certain circumstances, so you’re not completely free from liability.

Tax Benefits
There are special tax credits for small businesses in Canada, which means more money coming back to the company’s bank account.
 

Main Disadvantages of Incorporating

Similarly, there are two main reasons that may deter you from wanting to take the plunge into incorporation: paper work and upkeep, and extensive record-keeping.

Paper work and upkeep
Being registered with the government comes with a number of responsibilities and paperwork. Corporations are highly regulated. The amount of work to keep up with compliance can be cumbersome.

Extensive Record-keeping
Having a good set of accounting records and a file of important documents is essential, especially for tax purposes since a tax return must be prepared for a corporation. On the other hand, as a sole-proprietor you can just include your income on your personal tax return that you fill out every year.
 

Overall, being a corporation requires an extensive amount of work in order to maintain good standing with the government. It’s advised to incur the extra costs to find someone who has the know-how to do it right because it will save you headaches and heartaches. Thus, with small operating budgets, incorporating may not be the most viable option for your business in its current stage. In the next part, I’ll take you through my agency’s decision to incorporate and explain why it was right for us.

Read more

• Read Part 2 here
• Read Part 3 here