New Business - Canada

[CANPRO]

Hello all - I am looking for some advice, specifically from Canadian engineers, but all input is welcome.

I am currently employed by a contractor and I am considering starting a small business offering consulting services - area of practice would be structural and likely mostly in the residential market. The services I would offer would not overlap or conflict with my employers business and I have the blessing of my current employer. I have experience as a consultant.

Starting off, I don't expect to make much money with this business. I do not plan to look for work, but will take it as it comes. Not having an established business, I've turned away about $3,000-$5,000 worth of work in the last 6 months that has just happened to come my way - family, friends, friends of friends. I may also have the opportunity to provide some contract work for a larger firm. It's not a lot of money, but if I can make an extra $5,000-$10,000 a year working some weekends and evenings, I will gladly take it. Aside from a bit of extra money, this is a good chance to establish myself and maybe open the doors to more work in the coming years.

I have some questions about this - I am posing the same questions to my local association/accountant/insurance provider, but I'd like to hear the experiences of others as well.

- I know professional liability insurance is standard - but is it a legal requirement? Given that I may end up with exactly $0 in fees at the end of the year, I don't want to shell out for insurance upfront. For low risk residential work, can I provide services without insurance? What would be the approximate cost for low volume, low risk work? This is a question I will send off to some insurance companies, but again, your input is appreciated.

- Incorporated vs Sole Proprietorship - From what I've read so far, it seems like running my business as a sole proprietor may be the best option starting off. Startup costs are less and yearly dues with my association are lower. Is there any compelling reason not to go this route? If I end up billing very little, my biggest financial benefit to having this business is probably going to be claiming a portion of my expenses at home as business expenses. It appears that I can do this as a sole proprietor. Would I be exposing my family to any risk by having my business located in my own home? Could I mitigate this risk by incorporating and providing some separation between my business and home? Like I said, I'll be involved in low risk work, but I can't risk my family home no matter how low the risk. I've read the recent thread about putting assets in a trust - I may consider putting my house entirely in my wife's name or starting a family trust.

Those are the two biggest topics that have been on my mind. If anyone has any general advice or possible pitfalls to avoid, I'd love to hear what you have to say.

 

[TGS4]

Which province are you in? There are different professional rules in this regard.

 

[moltenmetal]

If you are providing services directly to the public, rather than to other firms who might be able to self-insure on your behalf, you would be a total fool NOT to obtain professional liability insurance if you undertook such "moonlighting" work. And in some provinces, you likely have no option- if you want to stamp drawings, you need a C of A, and if you need a C of A, you will need to either have liability insurance in your case.

Friends and family ARE the general public. Make no mistake, they WILL sue your @ss off if you screw up. They will also not pay you sometimes, or otherwise rip you off. They will not respect the fact that you do this for a living. That is absolutely not true of all, but it WILL be true of some. Be prepared for alterations in your relationship with anyone with whom you also do business, or just don't do the business.

You could start out without incorporating, but incorporation does give meaningful protection to your family assets. Not ultimate protection- they can still get at your personal assets in the case of fundamental breach of contract or criminal action, but if you carry enough insurance your personal assets are probably going to be adequately protected by the corporate veil unless you do something spectacularly stupid.

All this being said: I've moonlighted before, and will again, and have never regretted it for a minute. You're doing the right thing by being transparent about it with your employer, and your employer is being uncharacteristically reasonable with you about the whole thing. Don't take unfair advantage of them- keep the two enterprises separate- and this could be a very rewarding addition to your career.

 

[JGard1985]

Hi CANPRO

I left my job a few years ago to break out on my own. We're in the U.S. so things may differ but:

-We are a professional corporation with two partners. We did this as opposed to partnership for several reasons including taxes.

-Get a lawyer,and understand the risks. One thing I came away with is the limits of a lawsuit in the US (Retirement is not touchable nor is joint assets with the wife e.g. house)

-Really, really look into insurance costs for Professional Liability and Commercial General Liability. In the US several companies offer these policies, but the moment you mention structural engineering its an "exclusion" and they wont write you a policy.

-There's also a threshold for insurance costs on the low end, its not a totally sliding scale. We're in the lowest tier and still insured for over $2M, because that's the minimum.

-Closing thought: Build a business plan for a year with your E&O and Commercial Liability quotes in it. See what revenue it takes to go from red to black. IMO $10K/year in revenue probably isn't worth it when you incorporate the insurance costs.

Hope I didn't burst the bubble.

Jeff
Pipe Stress Analysis
Finite Element Analysis

http://www.xceed-eng.com

 

[Canuck65]

CANPRO,

In my past, I have done exactly as you are now contemplating. I was on my own for about 5 years, then did some work on the side for several years after that. My experience is in Ontario.

- C of A is mandatory with the PEO.
- I ran as a sole proprietorship and did nothing to hide my assets. I had no issues and did work on some very complex projects, in addition to the regular residential and small building type stuff. (on a side note, an old boss of mine had an affair and was caught ... and all his assets were in his wife's name .... a bit of karma)
- I always carried E&O insurance, and still do to this day, until the statute of limitations runs out. For a small business, it wasn't too bad, it ran about $2,750 to $5,000 per year and is now down in the $2k range as wrap up insurance. Relatively easy to pay for your insurance with your first 2 or 3 jobs, then it's off to the races for the rest of the year and perhaps you can save up a little nest egg to pay for the 2nd years insurance when it comes due. Also keep some money in your business account for HST quarterly and taxes at the end of the year.
- It is possible (but not recommended by me) to operate without insurance, however, you have to inform each and every client on each and every project , in writing, that you do not carry insurance and get a sign back from the client for your file. I think PEO has a standard form. (I would check this with PEO as it could have changed in the last few years).
- I went to a lawyer with a seemingly good reputation for advice on Incorporation vs. Sole Proprietorship and I felt the advice was useless, essentially nothing I didn't already know/common sense. The only piece of advice I remember was that it is typically a very brief procedure in court to link your personal life with the corporation. Others that I know with significantly larger companies have holding companies that have shares in the corporation.
- having your business in your home will give you tax deductions against your income. However, if you have clients or contractors come to your house, consider adding a General Liability Policy. Typically about $500/year.

Good luck.

 

[CANPRO]

Thanks for the info everyone, and sorry for the late response - a lot came up after writing this post and the whole idea of starting my own business had to take a back seat. Probably a good indication that I'm not ready to take this step. Jeff, you might have burst my bubble a little bit, but I'dd rather have that done here and now than in a year when I'm losing money.

 

[canwesteng]

Depends where you are - in Sask, you don't need a CoA if you are working on your own, but you do need permission to consult. You also receive liability for $15k of moonlighting with your p eng fees. So it's basically zero risk to do what you're proposing over here (minus negligence that wouldn't be covered by insurance).

 

[XR250]

CANPRO,

Be careful doing work for friends and family. Their expectations do not ever seem to be the same as a client that you do not know. Also, you can't charge them full rate without feeling guilty.
I recently have instituted a no friends and family policy in my business and am much happier.
I have also found it is not worth the hassle of writing off one room in your house for the small tax break it will yield. (I'm in the US)
It is a red flag for an audit and when you sell the house, you have to deal with recapturing depreciation etc.

 

[CANPRO]

canwesteng, thanks for that info. I'll have to contact my local association and see if my fees cover something similar.

XR250, writing off some home expenses was very appealing to me. If I don't make any money in a year than I can still claim a loss and save some money on taxes - great point about that raising red flags...I'd have to take a look at exactly how much of a financial benefit that would be and if it would be worth the headache.

 

[BrianPetersen]

I have a home office and I intentionally DON'T write off any depreciation or expenses on it. With the way housing prices in the Toronto area have been going, writing off depreciation of a home office would result in a capital gain to declare (on that portion which was allocated to the home office as opposed to being the primary residence) when it comes time to sell the house.

Capital gains on your primary residence are tax-free but on the other hand you can't claim losses, either (but this has hardly been much of an issue). The piece that you declare as office space isn't your primary residence ...