Should You Incorporate Your Side Hustle?

Written By Michael Martin

If your side hustle is starting to feel more like a second career, you might be wondering: Should I incorporate? It’s a smart question — and the answer depends on your income, risk exposure, long-term goals, and tax strategy.

Let’s break it down.

What Does Incorporation Mean?

Incorporating means creating a separate legal entity — a corporation — that owns and operates your business. You become a shareholder (and often a director), and the corporation earns income, pays taxes, and can enter into contracts independently of you.

Benefits of Incorporating

1. Tax Deferral Opportunities

  • Corporate tax rates in BC are significantly lower than personal rates (as low as 11% on the first $500,000 of active business income).

  • You can leave excess earnings in the corporation and defer personal tax until you withdraw funds.

2. Limited Liability Protection

  • Your personal assets are generally protected from business liabilities, unless you’ve personally guaranteed debts or acted negligently.

3. Professional Credibility

  • A corporation can signal stability and professionalism, especially if you're working with larger clients or institutions.

4. Income Splitting (with limits)

  • You may be able to pay dividends to adult family members who are shareholders, though the Tax on Split Income (TOSI) rules restrict this.

5. Lifetime Capital Gains Exemption (LCGE)

  • If you eventually sell shares of your qualifying small business corporation, you may be eligible for a tax exemption on up to $1 million in capital gains.

Downsides to Consider

1. Higher Administrative Costs

  • You’ll need to file separate corporate tax returns, maintain annual records, and pay for legal and accounting services.

2. No Automatic Tax Savings

  • If you’re withdrawing all income personally, incorporation may not reduce your tax bill — and could increase complexity.

3. TOSI and Passive Income Rules

  • Income splitting is restricted, and passive investment income over $50,000 can reduce access to the small business tax rate.

When Does Incorporation Make Sense?

Here are a few signs it might be time:

Scenarios if incorporation is worth it or not:

  • You earn over $100,000/year from your side hustle: Yes — tax deferral can be significant

  • You want to reinvest profits into the business: Yes — keep funds in the corporation

  • You’re working with high-risk clients or contracts: Yes — liability protection matters

  • You plan to sell the business someday: Yes — LCGE could save you thousands

  • You need all income for personal use: Maybe not — no tax deferral benefit

Final Thoughts

Incorporation isn’t a one-size-fits-all solution. It’s a strategic move that can unlock tax advantages, protect your assets, and help you scale — but only if it aligns with your financial goals.

Before making the leap, talk to a tax advisor and lawyer who understands your business and can help you structure things properly from day one.

Want help evaluating your side hustle’s incorporation potential? Reach out — I’d love to help you crunch the numbers and build a smart tax strategy.

Michael Martin
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