Should I Incorporate My Business?

The short answer is that it depends on many factors, including:

• How much revenue the business earns 
• What your goals are for your business
• What your personal tax situation looks like
• What type of business it is 
• What the potential legal liability is within the business

And that’s just to name a few.  

The issue is a complex one, but this comprehensive guide to business incorporation will help you understand the pros and cons of incorporating your business in Canada. 

We will look at examples of when it may be a good idea to incorporate, and when you might want to avoid it.

Benefits of Incorporating a Business

Let’s start with a summary of the advantages of incorporating your small business and then we’ll go into more detail for each item.

• Limited Liability — Operating your business through a corporation provides a layer of security against personal liability. It makes it more difficult for someone to go after your personal assets if the business defaults on its debts.
• Tax Savings and Deferral — In some situations, corporations have a lower tax rate than individuals. Operating your business through a corporation instead of a proprietorship can help to defer and save taxes. 
• Income Splitting — Income splitting used to be a major reason for incorporating your small business. Since 2018, this has changed significantly due to some new tax regulations. It can still work, but is now much less of an advantage than is used to be.
• Lifetime Capital Gains Exemption (LCGE) — The LCGE allows some incorporated businesses to sell at a gain of up to $913,630 without paying any tax.
• Estate Planning — A corporation is a separate entity to you, so it continues to live on regardless of what happens to you. This can be helpful when planning to transfer your assets to others.

Disadvantages of Incorporating a Business in Canada

When deciding whether or not to incorporate, you need to weigh the advantages against the potential disadvantages, which we’ll discuss next.

We’ll begin with a brief overview of the disadvantages and then go into more detail for each.

• Incorporation Costs — There are costs involved when starting a company. Having a lawyer help draft the documents of incorporation is a good idea, but it isn’t cheap.
• Ongoing Costs — There are annual legal filing fees to be paid as well as fees to have an accountant file the annual corporate tax return.
• Administrative Burden — The corporation requires legal and tax filings each year to remain in good stead with the authorities. This requires attention and is a time commitment for the owner(s).
• Losses More Difficult to Use — If your business sustains financial losses, it is more difficult in a corporation than in a proprietorship to use those losses to reduce future taxes.
• Pay More Taxes — In some scenarios operating your business through a corporation could actually mean you pay more taxes than if operating as a proprietorship.