What is corp to corp?
Are you looking to hire a C2C worker and you want to better understand the nature of the relationship?
You heard of a C2C relationship or C2C independent contractors and you wonder what that entails?
We’ve got great news!
In this article, we will break down the corp to corp concept in detail!
Are you ready?
Let’s get started…
Corp to corp meaning
Corp to corp, or C2C, means a relationship between a company and another company.
Corporation to corporation.
Generally speaking, this expression is used when companies look to hire workers, freelancers or independent contractors.
A company may hire resources in different ways:
- Full-time or part-time contract employees for a limited period of time
- Unincorporated individuals owning a business for a project or a task
- Incorporated individuals owning a business for a project or a task
In the United States, a contract employee is considered a W-2 employee, an unincorporated individual is a 1099 and an incorporated individual is a corp to corp.
In Canada, the different types of resources are similar:
- Contract employees or temporary workers
- A sole proprietorship when a person is unincorporated
- An incorporated business when the person renders services through a company
Depending on the nature of the relationship, the parties will have different rights and obligations particularly in the manner they execute their obligations and the taxation of their revenues or income.
Let’s look at the differences between an employment relationship, an unincorporated individual and a corp to corp.
Employee vs a corp to corp relationship
What is the difference between an employment relationship and a corp to corp relationship?
Employment relationship
An employment relationship is what we are familiar with.
It’s when a person is hired to work full-time or part-time for a company and is given a salary in exchange for their ongoing services.
The difference between a permanent employee and a contract employee is that you hire a contract employee for a specific amount of time whereas the permanent employment does not have a defined end date.
In an employment relationship, the employer has important responsibilities towards the employee such as:
- Provide the tools and means for the employee to work
- Manage the employee’s time
- Assign projects and tasks to the employee on an ongoing basis and an as-needed basis
- Monitor the employee’s work based on the company’s standards
- Provide the necessary training and support to the employee so they can succeed in their job
The employer has an important control over the employee’s job, performance and overall work.
In an employment relationship, the employee is subordinated to the employer and must perform his or her duties with loyalty and care as needed by the employer.
Furthermore, in the context of an employment relationship, the employee does not take any business or commercial risk with the employer.
The employee is entitled to the defined salary no matter how much the company generates in revenues or how much money it loses.
An employee is generally entitled to:
- Salary or variable compensation
- Worker’s compensation
- Unemployment insurance
- Disability insurance
- Group benefits
- Medical benefits
- Paid vacation
- Paid time off
- Pension plans
These are just a few examples of what an employee may be entitled to based on his or her employment contract.
In the employer-employee relationship, the employer assumes the important tax administration burden.
Whatever the employee’s compensation may be, the employer is required to deduct a certain amount of taxes on the employee’s salary at source and remit it to the government on behalf of the employee.
Corp to corp relationship
The corp to corp or C2C relationship is one where a person is hired as a service provider, and not an employee, and enters into a business contract with the client, and not the employer.
In other words, a contract worker or independent consultant has an incorporated company and his company signs a commercial contract or a service contract with clients looking to hire the contract worker.
Hence, it’s a “corporation” entering into a contract with another “corporation”.
Often, under a corp to corp relationship, a company will retain the services of another company to perform a specific task or project.
When an incorporated contractor is hired, the contract will be responsible for:
- Defining his own work schedule
- Bringing his own tools and equipment to get the job done
- Getting his own business insurance
- Assuming business risk in generating revenues
- Assuming business expenses
- Paying and remitting his own taxes to the government
- Assuming the registration and formalities of his company
- Getting registered for his own worker’s compensation coverage
Essentially, under a corp to corp relationship, there is no employer and employee link of subordination.
As such, the incorporated worker can accept or reject work or assignment whereas an employee must perform the work demanded by the employer.
The incorporated worker retains the freedom to define the way and means of performing his duties and getting the job done.
On the flip side, the incorporated worker is not entitled to vacation days, unemployment insurance, group benefits and other types of benefits as he is not an employee of the company.
Unincorporated worker vs corp to corp
We’ve covered employees and corp to corp relationships.
How about the unincorporated workers.
An unincorporated worker or sole proprietor is an individual who operates a business under his or her own name.
The unincorporated independent worker operates in the same fashion as the incorporated worker, manages his own business, defines the projects and mandates it wishes to work on and assumes his own costs and liability.
The difference is that the independent worker signs a commercial contract with the client using his personal name and gets paid personally for services rendered.
In some cases, it is simpler to work as a sole proprietor as opposed to incorporating a business.
Running a business as a sole proprietorship takes very little administration and is very easy to setup.
That’s why some decide to conduct business as a sole proprietor.
However, the biggest advantage of incorporating a business is the liability protection shareholders can benefit from.
Benefits of a corp to corp relationship
There are some important benefits to work under a C2C relationship with a company instead of being hired as an employee.
Benefits for independent workers
The worker choosing a C2C model instead of being hired as an employee can benefit from increased cash flow.
The primary reason why the cash flow is higher is due to the fact that the employer, the client, does not have an obligation to withhold any taxes on the services fees paid to the service provider.
The client will pay the contractor’s corporation its service fees and the contractor is responsible to pay his company taxes to the government.
The worker will also have the freedom to choose his or her clients.
Think about it this way, the independent contractor is running a business.
As a business, the ultimate goal is to maximize revenues and net profits.
As a result, the freelancer or independent contractor has the interest to take profitable projects and stay away from expensive and costly ones.
Depending on the type of work, a contractor may end up with tax advantages that would not be otherwise available as an employee.
Last, but not least, the corporate entity protects against liability.
When you run a limited liability business, you are shielded from possible debt, lawsuit or claims.
Benefits for employers
Employers can also benefit from a corp to corp relationship.
Hiring employees for a company is expensive.
Not only you must regularly pay the employee’s salary but you must also register them with the local authorities for worker’s compensation, pay employment-related taxes, withhold taxes on their behalf, train your employees and so on.
Hiring a company as a service provider to handle a specific project or task may be cheaper and easier to setup.
By hiring incorporated workers, client companies benefit from having less employee headcount on the payroll.
They will also hire individuals experienced to handle the project or assignment they are looking to accomplish.
As such, a C2C worker should be able to immediately hit the ground running.
Also, when the job is done or the project is finished, the client does not have an obligation to continue paying the service provider.
They can terminate the commercial relationship with a simple notice whereas terminating an employee must follow requirements of the domestic labour laws.
Corp to corp disadvantages and risks
The corp to corp has important benefits but it also has drawbacks.
An important risk for employers is that if they misclassify an employee, they can be exposed to important fines, penalties and liability towards the misclassified worker.
For example, an employer cannot hire an employee disguised as an incorporated business.
In the event of a dispute or an audit, if the authorities discover the employer has misclassified an employee as an independent contractor or intended to avoid labour law obligations, the employer can face important sanctions.
In addition to the company’s exposure to regulatory fines and sanctions, the company may also be exposed to claims filed by the independent worker.
Often, the independent worker will argue that he or she was truly an employee and not an independent consultant or contractor.
They will argue that although they signed a corp to corp contract, they were really subordinated to the demands of their de facto employer who controlled all aspects of their work just like an employee.
The independent contractor will attempt to establish they had and implicit employee status.
If the courts recognize that the independent contractor was essentially an implicit employee, then the labour laws would apply to that relationship as if the person was hired as an employee.
The de facto employer may be exposed to labour law violations requiring it to compensate the de facto employee.
Corp to corp checklist
For companies looking to hire freelancers and independent consultants, to validate that you are truly in a corp to corp relationship and avoid misclassifying an employee, here are some questions you should answer:
- Does the independent worker have a registered company
- Is the independent worker’s company in good standing
- Does the company have a Tax ID and registered for sales taxes
- Is the independent worker incorporating a company for this assignment or do they have a history of working on other assignments in a corp to corp relationship
- Is the independent worker already registered for worker’s compensation
- Does the independent worker work with subcontractors
- Does the independent worker have employees in his or her company
- Does the independent worker have special expertise in the intended assignment
- Does the independent worker have other clients
- Does the independent work have errors and omissions insurance (E&O) and commercial general liability insurance (CGL)
- Will the independent worker bring his or her own equipment to get the job done
- Will the independent worker present himself as part of the client’s organization
- Will the independent worker participate in internal meetings of the company that generally only employees attend
- Will the independent work have the freedom to decide on how to get the job done
- Will the independent work get paid days off or vacation
- Does the independent worker advertise his business in any way
- Does the independent worker have a website and online profile showing his expertise
Employers or companies looking to hire an independent consultant should go over these questions to get a better sense of the real nature of the relationship they are contemplating.
Who can benefit from a C2C contractor
Often, small businesses will find it more advantageous to hire a C2C contractor as opposed to a contract employee or a permanent employee.
The corp to corp setup makes a lot of sense to small businesses as they do not have the financial capacity to take on additional headcount.
Hiring a corp to corp contractor allows the small business to find someone to handle a specific project or assignment, who is experienced enough to start work immediately and with whom the commercial terms can be clearly spelled out in the contract.
A corp to corp setup can also benefit individuals who do not want to remain employed by the same company and have a specialized skill that can potentially benefit many clients.
A C2C contractor can generate substantially more income than as a full-time or part-time employee in a company.
Freelancers will generally opt for a corp to corp set up to maximize their revenues, minimize their personal liability, have the freedom to determine their work schedule and choose their clients.
Corp to corp tax implications
Just like any employment or business relationship, it’s important to understand the tax consequences.
In an employment relationship, at the end of the year, the employer must send the employee a tax slip outlining all the earnings and benefits they received along with how much income taxes were already withheld from the employee’s paychecks.
The employee will use the tax slip to file their income tax.
The employer handles the bulk of the tax administration for the employee as they are required to withhold income taxes from the employee’s salary at the source, remit the taxes to the government, issue tax slips to the employee and so on.
In a corp to corp setup, the client does not provide the contractor tax slips.
The contractor is responsible to calculate his business revenues, deduct eligible expenses and pay taxes based on the company’s net income.
The C2C contract must also manage the charging and remittance of any applicable sales taxes in its ongoing commercial dealings.
The client will have significantly less tax administration to do as compared to hiring an employee.
The tax administration and burden falls on the shoulder of the independent contractor and his company.
Takeaways
In this article, we tried to better understand what is corp to corp.
A corp to corp relationship or C2C is a type of relationship where a corporation does business and pays another corporation.
Generally, we see this type of setup when talking about independent consultants, independent contractors and freelancers.
We must distinguish the corp to corp with a temporary employment contract or sole proprietorship.
While an employee is subordinated to the demands of the employer, handles the assigned work as determined by the employer, assumes no business risk and expenses and is entitled to a salary, a corp to corp setup is a business-to-business relationship (B2B).
The person who will do the work is not hired as an employee but is a service provider.
The company that needs the work to be done is not an employer but a client.
The service provider and the client enter into a commercial contract where the client pays fees in exchange for services on a specific assignment, mandate or task.
There are many benefits to working corp to corp.
Small businesses can retain the services of people they need for their projects without having to add another person to their headcount.
Freelancers or independent contractors can generate higher cash flow from the relationship compared to working as an employee.
It’s important that you consult with a lawyer to better understand your rights and obligation relating to a corp to corp engagement to avoid any fines, penalties or sanctions due to misclassification of workers or improper tax administration.
We hope this article helped you better understand corp to corp.
Have you ever worked as a corp to corp independent contractor?
We would love to hear from you.
Drop us a comment!
