EVERYTHING THAT YOU NEED TO KNOWWHEN CREATING A CONSULTING

CONTRACT www.easylegalhelp.ca

Consultants are becoming more and more commonplace these days.

In fact business consulting and consulting services is a billion dollar industry that’s only expected to grow in the next few years.

Because this is an industry that’s growing, it’s important to understand from the employer’s side and the consultants’ side what to know when putting together a consulting contract.

The first thing to consider, is that there’s the provider and the receiver of services. The things that would matter to the person providing those services may not be the same things that matter to the person receiving those services.

When you’re providing services, our recommendation is to create your own standard agreement that you use for all your clients. This may get amended based on each of your clients. However, one thing you should consider is if there any exclusivity in this contract.

In other words, you want to ensure that there isn’t something in this contract that says, “I can ONLY now provide services to this particular person or this particular company and nobody else.”

In other words, you want to ensure that there isn’t something in this

contract that says, “I can ONLY now provide services to this particular

person or this particular company and nobody else.”

The second thing to consider is if you are providing these services as an individual through a sole proprietorship or are you setting it up through a corporation?

That’s important to consider because of the tax implications. You may find that a company can give you a wider range of expenses that might bring your taxable income down from an actual person or individual or sole proprietor that’s running the same type of business.

You might find that you have more leeway and more control over money that’s coming into the corporation rather than a sole proprietorship.

The other difference between a sole proprietorship and corporation is protection.

When you run a business in any company or corporation or some kind of limited liability vehicle, you are separate from that particular entity or that vehicle.

Why that’s important, is because from a liability perspective, if you own a whole bunch of assets in your name, and the liability stays within the company or corporation or limited liability vehicle, it’s very rare that they’re going to pierce through that vehicle to come after you personally.

This means that your house, car, personal earnings etc. have an added layer of protection and safety versus a sole proprietorship.

The next point to consider is that your contract has some liability language inserted in to the contract. What that means, is that you have stated clearly in your contract what you will and will not be responsible for and what you will produce for the duration of the contract.

Now just having liability language into the contract won’t protect you fully in the event of a mistake or mix up. That’s why we recommend that you get some type of liability insurance in event that something does happen.

Something that’s often overlooked, is how and when do you as the service provider get paid?

That doesn’t mean that the rate isn’t in the contract, but what’s missed is the particular sentence, clause or paragraph that states how and when you get paid. Is it hourly or by project? Will you be invoicing the client every 2 weeks, weekly?

When left open for the recipient of the services to pay people in the way they want to pay people it may not work for you, the service provider.

If you are doing it by a per-project basis, usually that means half up front and half upon completion otherwise, it’s usually an hourly or monthly rate that’s invoiced during the beginning or end of the month.

Have something in your agreement that explicitly states when you are

going to invoice the client and when they need to pay you for your services.

Another common thing that often goes unlooked at is how you will be taxed.

Contractors and consultants are taxed differently than employees. As an employee your employer withholds a certain amount of your salary and gives that to the CRA and then at the end of the year you file a tax return and figure out if you are going to get an income tax return.

As a contractor the client does not withhold anything, meaning whatever you invoice is what you will be paid by the client and then you as a contractor are responsible for your own taxes.

That’s pretty straightforward however, here is where things can become an issue.

The Canada Revenue Agency have their own tax code based on what is considered to be an independent contractor and an employee.

Just because you call yourself a contractor in the contract, if you don’t know what those taxes are for the Canada Revenue Agency you run the risk and the person you’re providing services to runs the risk of a tax authority coming in and saying we don’t care what you call your contractor or what you call your person.

We’re calling them an employee, and now there’s all kinds of penalties for not doing it properly and reassessments.

When you’re doing any kind of contract or arrangement, you should go to an expert about this particular issue.

Someone who actually knows if the Internal Revenue Service or if Canada Revenue Agency have a test to determine whether you’re really a contractor versus an employee and making sure that both parties understand what those are and make sure that you live them in your performance of services.

A COMMON EXAMPLE OF THIS CAN LOOK LIKE THIS:

If I call you an independent contractor, but I say you have to come into my offices from 9am to 5pm, and I’m providing you with the tools you need to do the job and the work to work on, to the CRA they might call you an employee.

In order to get around that situation, you might word the contract as no set hours but six or seven hours per day plus the contractor or consultant brings their own materials (ie. Laptop or phone) and that they aren’t required to be in the office.

Another thing would be, if I’m an independent contractor, and the only client I have is one client, so I’m providing 100 percent of my services to one client, a taxing authority may look at that and say, “Are you really running your own business? You have one client.”

There might be situations where businesses only have one client, but you’ve got to be careful. What I would suggest is, you could have a bigger client, but provide the same services to three, four, or five other clients and get income from them, get paid by them for the services you provide.

Again, it’s important that you have a solid agreement in place when you are consulting or hiring a consultant so that it’s crystal clear what you are getting and that it mirrors what you have talked about.

The best way to ensure that is to get a lawyer, talk to them, and you can actually achieve on paper what you want to achieve in reality.