How to Know It’s the Right Time to Incorporate Your Business

Chances are, you’ve heard someone say, “You should incorporate!” Some swear it made a huge difference. Others say it just added more costs and stress.

So, how do you know if it’s the right move for your business?

In this post, we’ll break down what incorporation means, the perks, the drawbacks, and how to decide if it’s the right time for you.

What Is a Corporation?

When you run a business as a sole proprietor, you and your business are the same. The money you make goes on your personal taxes, and any risk in the business is on you personally.

When you incorporate, your business becomes a separate legal entity. It can:

• earn money
• sign contracts
• pay taxes

You, as the owner, become a shareholder. You can pay yourself a salary or dividends, and the corporation itself is responsible for its taxes and legal obligations, separate from your personal tax filings  — which changes how taxes work and how you can manage money in the business.

1. Lower Taxes on Money You Leave in the Business

Notice I didn’t say “lower tax rates.” A lot of people assume that incorporating automatically means paying less tax but that’s not how it works.

First, you first have to pay yourself, either as a salary or dividends. Dividends come from after-tax profits, so they work a little differently than salary.

Only the profit that stays in the corporation after paying yourself is taxed at the lower corporate rate. This can give you more flexibility to reinvest in your business or save for future expenses.

2. Planning for the Future

Incorporation can make it easier to:

• pass your business on to family
• grow beyond yourself

For example, you can “freeze” the value of shares for succession planning. And keeping profits in the corporation allows you to plan for your personal future while paying less in taxes upfront.

3. Limited Liability

One of the big perks of incorporating is that your personal assets are usually protected from business debts or legal issues.

That said, if you personally guarantee a loan or mix your personal and business finances, your personal assets could be at risk. Basically, you need to treat the corporation as its own legal entity — separate from yourself.

The Drawbacks of Incorporating

1. Added Costs and Complexity

Incorporation comes with extra responsibilities:

• filing corporate tax returns
• issuing tax slips for yourself 
• managing payroll if you take a salary

All of this usually requires professional help. Incorporation means ongoing expenses like accounting and legal fees. Make sure the benefits outweigh these costs before making the leap

2. Not Everything Benefits from Lower Taxes

Some types of income inside a corporation, like investment income, are taxed at a higher rate. Incorporation doesn’t automatically make all your money “cheaper” in taxes.

3. Ongoing Costs

How to Know If It’s the Right Time

A good rule: incorporating starts to make sense when your business earns more profit than you need for your personal expenses. This lets you leave some profits in the corporation and benefit from lower corporate taxes, while still paying yourself what you need.

Before deciding, it’s smart to talk to both an accountant and a lawyer. They’ll help you weigh the benefits, costs, and risks for your specific situation.

Incorporation can be a powerful tool, but only if the timing and setup are right.

What’s Next

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