Should You Incorporate Your Business? What Many New Business Owners Get Wrong
I was talking to a new client this week. They’re tradespeople and had already incorporated their business before coming to us. In this case, I actually wished they had spoken with an accountant or lawyer before making that decision.
I don’t always recommend calling professionals before every business decision. But when it comes to incorporating, it’s one of the few areas where getting advice first can really matter. A lot of people assume you have to incorporate to be a “real business.”
That’s not actually true.
Why Business Owners Incorporate
There are two main reasons businesses incorporate.
- Limiting Personal Liability
One of the biggest reasons to incorporate is protecting your personal assets.
If you operate as a corporation, the company becomes a separate legal entity. That means in certain situations your personal assets may be better protected from business liabilities.
This can be important for higher-risk industries.
For example, if your business involves employees working at heights, operating heavy equipment, or doing work that carries physical risk, incorporating can add a layer of protection.
But many businesses are not operating in those environments.
If you’re a consultant, for example, and you carry proper insurance, the liability risk may already be reasonably managed.
- Tax Deferral Opportunities
The second major reason businesses incorporate is tax deferral.
If you have a strong year and make significant profits inside a corporation, you don’t necessarily have to withdraw all of that income immediately.
Instead, you can leave some money in the corporation and withdraw it over future years. That allows you to spread out personal income and potentially avoid jumping into higher personal tax brackets.
For example:
- A business owner has a banner year with high profits
- They leave some earnings inside the corporation
- They withdraw income gradually over the next few years
This can help smooth out personal taxes.
If the same income was earned as a sole proprietor, the full amount would typically be taxed personally in that same year.
When Incorporating Starts to Make More Sense
For many small business owners, incorporation becomes more valuable when income reaches higher levels.
If you’re making around $100,000 to $110,000, your personal tax rates are often not dramatically higher than corporate rates once everything is considered. At that level, the tax advantages of incorporating may not be significant enough to outweigh the extra costs.
However, when business income starts reaching $175,000 to $200,000 or more, the tax deferral opportunities can become much more meaningful. That’s when incorporating often starts to make stronger financial sense.
Sole Proprietorship vs Corporation in Canada
Many new entrepreneurs think incorporation is required to operate a legitimate business. It isn’t.
You can run a fully legitimate business as a sole proprietor. In fact, many businesses start that way.
You can:
- Register a sole proprietorship
- Operate under your own name
- Claim legitimate business expenses
- Build a profitable business
A sole proprietorship is simply cheaper and simpler to run in the early stages. There are fewer legal requirements, lower accounting costs, and less administrative complexity.
Incorporating Isn’t Always the First Step
A lot of successful businesses start as sole proprietorships and incorporate later once revenue grows or risk increases.The important thing is making the decision based on your actual situation, not because you feel like you have to incorporate to be taken seriously. Your business is just as real and just as valid whether it is incorporated or not.
Get Advice Before Making Structural Decisions
Every business is different.
The right structure depends on factors like:
- Your income level
- Risk exposure in your industry
- Your long-term growth plans
- Your tax situation
Before incorporating, it’s worth having a quick conversation with an accountant who understands both tax planning and business structure. Sometimes the best decision is incorporating. Sometimes it’s staying a sole proprietor a little longer.
Thinking About Incorporating Your Business?
At Kermode Accounting & Advisory, we help business owners understand when incorporation makes sense and when it doesn’t.
Whether you’re a trades business, consultant, or growing company, we can help you structure things properly from the start. If you’re considering incorporating your business, reach out. A short conversation can save you unnecessary legal and accounting costs down the road.
