Incorporating An Indie Hacker Business in Canada
If you are an indie hacker (a.k.a, IH), the dream is to have an income-generating side business.
Understandably, busy IHers like to spend time writing code, polishing products or talking with customers, rather than making the business formally recognized.
But an IH business is still a business. It needs to exist and be recognized as so.
Buying the domain AwesomeXYZ.com and pointing it to our breathtaking landing page make the business look legit.
But legally, it is not even clear that the business has rights to the name of AwesomeXYZ. Also, the business is not separate with the IHer’s personal asset and liability. It has consequences down the line when the business scales up and needs access to capital or meets the opportunity of selling the business.
This article tries to fill the void and covers the topics about tax, or the administrative side of things, like:
Should I incorporate? And how?
This idea of incorporating sounds old, associated with lots of paperwork and bureaucratic process.
I thought the same, too. But when I was working as a contractor, my partner and I had a few clients. We didn’t like the paperwork, but we had to go through the process of setting up a legal business structure in Canada.
In hindsight, the process was less painful than we thought. What’s more, incorporating gave us a lot of benefits, like more tax efficiency, and defining a legal or psychological boundary between us and our business.
Being a contractor and doing an IH business share many similarities. So I’m posting our learnings here.
If you happen to live Canada and want to go the Indie Hackers route, this post is for you.
First, it is much more tax efficient to incorporate than pocketing the money earned from indie hacking as your personal income.
Full-time software engineers in Canada usually earn a decent amount of salary (See one data point from levels.fyi), which fit in the high tax bracket.
In the Canadian context, we are looking at 30%+ marginal tax, meaning that, for each $10 you earn on top of your salary, more than $3 goes to the government. You can plug in your salary and see the math here.
Compared with that, business is usually taxed in a lower bracket. For small businesses, we are looking at 15.5% marginal tax.
30%+ vs. 15.5%.
Incorporating means that, with the same income, you keep more cash in the bank account, available to deploy them to generate revenue.
Also, you can write off a variety of expenses as business operating costs. CRA has clear, detailed guide on the categories of expenses. (P.S. I sometimes read the pages like software specs lol)
Some categories include:
- business use of home (If you work from home during COVID-19, read this carefully)
- vehicle expenses (for business use portion)
- office expenses
- telephone and internet
Operating a business teaches me to think of cash as a type of resources, just like your attention as indie hacker, or your laptop (equipment). In a sense, running a business is like playing a strategic board game like Catan.
The ways to deploy money vary. For example, you can buy more servers or laptops, or even out-source tasks to other freelancers and free up your time for more valuable work.
Another subtle but important side effect of incorporating is the separation of personal and business operations, both financially and psychologically.
For example, now when you’re paying the electricity bills, you are more likely to ask about concepts like ROI (return of investment), which is a different perspective to look at things and nudge yourself to become more professional.
Last but not the least, when you incorporate, firms or banks more likely to deal with corporations because of limited liability. It makes things easier to use other financial tools, like loans, if the business is going well and you need capital to expand.
How to incorporate in Canada?
If you live or have a valid address in Canada, the registration process is smooth and takes less than 15min to complete.
- Go to Canada.ca
- Follow the process and fill a few forms
- Pay the registration fee of $200
- Within minutes you would receive the articles of incorporation within minutes in your email.
But bear in mind, you need to be a resident Canadian to act as the director of a company. Generally, if you are a Canadian citizen or permanent resident, you should be fine.
If you are not a resident Canadian, you may consider registering a business in the province of British Columbia. The residency requirement is relaxed there. You may need the BDC service(~$300CAD/year) to get a B.C. address for your business.
After having the articles of incorporation, here are the next steps:
- Open a business bank account (BMO offers free business chequing account)
- Hire an accountant
- Talk to a lawyer to draft a bylaw (Strongly recommended if you have a partner)
More on the accountant. Mine took a one-time retainer fee so that I could consult her with more business questions when starting up in order to get things right. She also helped me set up quick method of accounting which simplified the GST/HST remittances and filing returns.
About paying yourself
Long-term tax planning
This is mostly for tax consideration. A simple execution plan is:
- you pay yourself something like $40K per year as dividends
- you can leave the rest of the money (aka. retained earnings) in the business bank account
- do the same for each of the following years
This way, you spread your earnings (assuming it is over a high amount) across multiple years. And the money you get out of the business is tax-free because these are corporate $$ which have been taxed in the corporate tax rate (15.5%) already.
How do you actually pay?
You may have heard that company and personal expenses stay strictly separate. This is always true. All company expenses should be for business purposes only.
Also, from the past experience of working in other companies, you get bi-weekly payrolls where all the legal deductions are taken care of. All the items on the pay slip look complicated.
How do you deal with payroll for your own company?
The answer is, you don’t, at least not at the moment when you withdraw money from company bank account. Here’s how it works:
- You can transfer funds from company account to your personal account.
- Each transfer transaction should be recorded in the books and marked as something like Owner’s Drawings.
- At the company year end, you can ask your accountant to classify those transactions as either salary or dividends.
For Canadian banks, making e-transfers is likely the easiest way to get money out of the company bank account. You can do cheques, too. In other words, as long as the transaction is tracked and covered in the annual financial statement, the form of withdrawing money doesn’t matter.
Note: For the amount you categorize as salary, your accountant should issue the T4 slip, and the company, and you as an individual, would probably owe the legal deductions (EI, CPP, etc.) to CRA. There is a deadline to emit the owed money after the company year end.
What’s unique about indie hackers / software development business?
A typical SaaS product has simple business model, and requires little upfront capital investment. All we need is like a laptop, renting cloud servers (e.g., AWS), and paying for other services. It makes business bookkeeping simpler.
To give you more perspective, try comparing SaaS with traditional businesses, e.g., opening a restaurant: You would need renovating, gathering application materials and waiting for months to get a restaurant licenses.
Compared with that, creating a website landing page is almost like nothing.
Your accountant may charge you less for preparing financial statements (but don’t quote me on that :P).
What makes things even easier, IHers are good at using online tools. For example, my partner and I use the following tools:
- Wave: For bookkeeping and invoicing
- MileIQ: For keeping track of vehicle usage.
- iCloud / Dropbox / Google Drive: For keeping paper receipts & records.
For our scale, the free versions of these service are sufficient for the daily operation. So there’s no need to hire a full-time bookkeeper.
Another advantage of IHers is that reading the online resources, like the CRA business expenses documents I post above.
They are very informative, like API documentation, written in plain language by people who have tons of experience. I think of them as society architects.
As software developers, we’ve read more difficult technical documentation than the CRA pages.
From those pages I learned a variety of topics about running businesses as well as how society works.
Finally, online businesses are less dependent on locations, so there are many ways to get revenue (a double-edge sword). No matter you are in remote areas or a metropolitan city, the SaaS products you build, or the landing page you spin up, are accessible to everyone.
In this post, I talk about my experience of incorporating a business for indie hackers. It brought many benefits, e.g., tax efficiency, psychological separation, more financing options down the road. And the process to incorporate in Canada was smooth and frictionless.
If you have (or will soon have) a revenue generating indie hacking business and you are based in Canada, incorporating is a no-brainer.
Disclaimer: This is a personal blog article. Any opinions expressed belong solely to the author. The article is for general information purpose only. The author does not offer the opinions with any professional capacity.