When It Might Be Time to Incorporate

Many business owners start as sole proprietors or partnerships, but as your business grows, incorporation may offer significant advantages. How do you know when it's the right time? Here are the key signs that incorporation might be worth considering.

What Does Incorporation Mean?

Incorporation creates a separate legal entity for your business. Instead of operating as a sole proprietor where you and your business are legally the same, a corporation is its own legal "person" that can enter contracts, own assets, and incur liabilities independently of you as the owner.

Sign 1: Your Income Exceeds $50,000-$75,000

This is often the most compelling reason to incorporate. As a sole proprietor, all business income is taxed at your personal rate, which can reach over 50% at higher income levels. Corporations benefit from the small business deduction, paying tax at approximately 11-13% (depending on province) on the first $500,000 of active business income.

If your business generates more income than you need personally, you can leave profits in the corporation, paying the lower corporate rate and deferring personal tax until you withdraw funds. This tax deferral allows you to reinvest more money back into growing your business.

Sign 2: You're Concerned About Personal Liability

As a sole proprietor, you're personally liable for all business debts and legal claims. If someone sues your business or you can't pay business debts, your personal assets (home, savings, vehicles) are at risk.

A corporation provides limited liability protection. Generally, creditors can only pursue corporate assets, not your personal property. This protection is particularly important if you:

• Work directly with clients or the public
• Operate in a field with higher liability risk
• Have significant personal assets to protect
• Take on business debt or leases

Note that liability protection isn't absolute—you can still be personally liable for personal guarantees, gross negligence, or illegal acts.

Sign 3: You Want to Split Income with Family

Corporations offer opportunities for income splitting that aren't available to sole proprietors. You can pay reasonable salaries or dividends to family members who legitimately contribute to the business, potentially reducing your overall family tax burden.

Recent changes to tax law have limited some income-splitting strategies, but legitimate planning opportunities still exist when family members actively participate in the business.

Sign 4: You're Planning for Retirement or Sale

Selling shares of a corporation can provide access to the lifetime capital gains exemption, which allows you to realize up to $971,190 (2024 limit) of capital gains tax-free when you sell qualified small business corporation shares. This exemption can save you approximately $200,000 or more in taxes.

The exemption isn't available when selling assets of an unincorporated business, making incorporation valuable if you plan to eventually sell or pass on your business.

Sign 5: You Want to Enhance Business Credibility

A corporate structure can enhance your business image and credibility. Some clients, suppliers, or partners prefer to work with incorporated businesses. Having "Inc." or "Ltd." after your business name can convey stability and professionalism, potentially opening doors to larger contracts or partnerships.

When Incorporation Might Not Be Necessary

Incorporation isn't always the answer. You might want to wait if:

• Your income is low: If you're earning under $50,000, the tax benefits may not justify the costs
• You have business losses: Sole proprietors can use business losses to reduce personal income from other sources
• Your business is simple: If you operate part-time or it's a side business, sole proprietorship may be adequate
• You want flexibility: Sole proprietorship is simpler with fewer compliance requirements

Costs and Considerations

Before incorporating, understand the additional costs and responsibilities:

• Setup costs: $200-$500 for provincial incorporation, $200-$1,000+ for federal
• Annual fees: Corporate registry fees, typically $20-$60 annually
• Accounting costs: Corporate tax returns are more complex and expensive than personal returns
• Additional administration: Corporate minute books, annual resolutions, separate bank accounts
• Complexity: You'll need to decide on salary vs. dividend payments, maintain separate records

Next Steps

If you're considering incorporation, schedule a meeting with an accountant to:

• Review your current and projected income
• Calculate potential tax savings
• Discuss your long-term business goals
• Determine optimal timing for incorporation
• Plan for a smooth transition if you decide to incorporate