Should You Incorporate?
Incorporation is one of the most common questions business owners wrestle with, and for good reason. It affects taxes, liability, long‑term planning, and even how you pay yourself. But the truth is simple: incorporation isn’t automatically a tax win. It’s a strategic tool, and like any tool, it works brilliantly in the right circumstances and poorly in the wrong ones.
This guide breaks down the real factors that matter so you can make a confident, informed decision.
1. How Much Profit Are You Actually Retaining?
The biggest misconception is that incorporation automatically saves tax. It doesn’t. The advantage comes from deferring tax by leaving profits inside the corporation.
If you spend everything you earn, incorporation rarely helps.
If you consistently retain profits, $50,000, $100,000, or more, incorporation becomes a powerful planning tool.
Rule of thumb: The more profit you can leave in the company, the more incorporation tends to make sense.
2. Do You Need Limited Liability Protection?
A corporation is a separate legal entity. That separation can protect your personal assets from business risks, though not from everything (e.g., personal guarantees, negligence, or certain tax liabilities).
If your business carries operational, contractual, or financial risk, incorporation can provide meaningful protection.
If your business is low‑risk (e.g., consulting with no employees), liability may not be the deciding factor, but it’s still part of the equation.
Disclaimer: This is not legal advice, please consult a business lawyer for legal liability advice.
3. How Do You Want to Pay Yourself?
As a sole proprietor, everything flows to your personal tax return.
As a corporation, you can choose:
Salary (creates RRSP room, predictable cash flow, CPP benefit, personally tax already withheld)
Dividends (flexible, simpler payroll)
A mix of both (often optimal)
This flexibility is one of the biggest advantages of incorporation, especially for long‑term planning.
4. Are You Planning to Sell the Business?
If you expect to sell your business someday, incorporation opens the door to the Lifetime Capital Gains Exemption (LCGE), a major tax benefit that can shelter a significant portion of the gain on the sale of qualifying shares.
If a future sale is even a possibility, incorporating early can make the eventual transition smoother.
5. Are You Ready for the Administrative Responsibilities?
Incorporation comes with:
Annual corporate tax filings
Corporate record‑keeping
Payroll or dividend documentation
Separate banking
Potential GST/HST complexities
These aren’t deal‑breakers, but they are real. If you’re not ready for the structure, incorporation can feel like overkill.
6. What Stage Is Your Business In?
Early stage: If you’re still validating your idea or revenue is inconsistent, incorporation may be premature.
Growth stage: If revenue is stable and profits are rising, incorporation often becomes the logical next step.
Mature stage: If you’re building long‑term value, hiring employees, or planning for succession, incorporation is almost always part of the strategy.
7. The Decision Framework (Simple Version)
If you answer yes to most of these, incorporation is worth serious consideration:
You retain a meaningful portion of your profits
You want liability protection
You want flexibility in how you pay yourself
You may sell the business someday
You’re comfortable with (or can outsource) the admin
Your business is stable or growing
If most answers are no, staying a sole proprietor (can incorporate later - consider a Section 85 rollover) may be the better choice, for now.
Final Thoughts
Incorporation isn’t about chasing tax savings. It’s about structure, flexibility, and long‑term planning. The right time to incorporate is when your business is stable enough, profitable enough, and strategic enough to benefit from the additional complexity.