Thinking of starting a business in Alberta? Already self-employed but contemplating incorporation? Here’s a quick overview of the differences between paying yourself as a self-employed business owner versus being a director of a corporation.
Self employment in Canada refers to starting a business under one of these ownership arrangements:
Corporations in Canada must be registered both provincially and federally and can have any number of directors or shareholders (owners). Incorporating is the process of creating a separate legal entity that, for all intents and purposes, can operate similarly to a person. For example, a corporation can enter into contracts with another corporation or person.
The important distinction here is that a corporation limits the legal liability that could impact owners personally under a sole proprietorship or partnership arrangement - hence the terms you sometimes see appending corporate names such as “Ltd.” for “Limited” or “LLC” for “Limited Liability Corporation”.
When you work as an employee of a Canadian corporation, you are no longer considered self-employed - even if you are the sole employee and/or shareholder of the company.
As the owner of a sole proprietorship or partnership, you have invested cash into your firm and (hopefully) used those funds to produce more money by selling your products or services.
You can elect to pay yourself in whatever amounts you choose - these are called owner’s draws. As a sole proprietor or part-owner, you are effectively pulling capital from your business to pay yourself or pay for other expenses. This could be based on key performance metrics, a static amount each month, or simply based on your best judgment to balance your personal expenses and business needs.
Here are some pros and cons of paying yourself using the owner’s draw method (and being self-employed):
As with the other methods, as the owner you get to decide the cadence and amounts of these payments. Paying yourself (hourly, daily, weekly, monthly, etc.) wages regularly is a good way to consistently track your own payroll expenses whether or not you’re already paying other staff from your business.
And with any formal payroll scenario, you’ll need to register for a payroll account with the CRA if you’ve not already done so to pay your employees. The penalties can also be quite severe if you miss remitting source deductions regularly!
Here are some pros and cons of paying yourself using the payroll (salary) method as a sole proprietor or part-owner in a partnership:
One option as a director of a corporation is to pay yourself in dividends. Normally when you think about dividends, they are amounts paid out to shareholders based on the financial performance of the company. The same applies here, except if you are the sole shareholder, you can make the decisions on when and how much you want to pay out as dividends - and if you are the lone shareholder, this method is very similar to owner’s draw for sole proprietors.
If you are going to be paying dividends, you will be required to record these in your minute book and issue a T5 form to each shareholder for that year.
Here are some pros and cons of paying yourself using the dividend method as a corporation:
Putting yourself on the payroll as a corporation is very similar to paying yourself a salary as a sole proprietor or part owner.
Here are some pros and cons of paying yourself using the payroll (salary) method as a corporation:
If you’ve made it this far - congratulations! You must seriously be considering starting a business or incorporating your existing one. We generally recommend self-employment for most scenarios as you start out unless you think you need the limited liability of a corporation for the type of business you are going to be running.
In the early stages of business whether you are planning to pay yourself regularly or not, cash flow management and forecasting is critical. A good bookkeeper » should be able to help you with that!
And if you need help running payroll in Alberta? We’ve got you covered ».