“You should incorporate” is common advice once a business starts doing well. Sometimes it’s right. Sometimes it adds cost and paperwork without much benefit. These questions help you think it through before a conversation with your advisors.
1. Do you need all the profit to live on?
A key advantage of a corporation is that profit left inside the company can be taxed at a lower rate on active business income. If you need to take out nearly everything you earn to cover personal expenses, much of that advantage shrinks, because the money is taxed again when you withdraw it.
2. How will you pay yourself?
Owners of corporations are paid through salary, dividends or a mix. Salary creates RRSP room and CPP contributions; dividends don’t. Each has different personal tax results. There’s no universally right answer.
3. Are you ready for more administration?
A corporation means:
- A separate T2 return every year
- Separate bank accounts and records
- Corporate records and an Ontario annual return
- Usually higher accounting costs
4. Do you work like an employee for one client?
Some incorporated contractors who would otherwise be employees of a single client can fall into the personal services business rules, which remove much of the tax advantage. Worth checking before you incorporate.
5. What about liability?
Incorporation can limit some business liabilities, but not all — personal guarantees, professional liability and certain obligations can still reach you. That’s a question for a lawyer.
6. What are your plans?
Selling the business one day, bringing in partners, or hiring staff can all tilt the answer toward incorporation.
The practical answer
Keep clean books either way. When the numbers are clear — what you earn, what you spend, what you need to take out — the incorporation decision becomes a calculation rather than a guess.
This article is general information, not tax or legal advice. Speak with qualified advisors about your situation.