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At What Income Level Should I Incorporate My Business?





While "corporation" may roll off the tongue when describing a big-box brand, it's not so commonly used to describe the small businesses around us. But the truth is, any business can become a corporation, at any level of income. Whether it's you alone on your laptop or a team of 100s, your business has the option to become a corporation. 


The question of whether you should, however, depends on a variety of factors.

In this blog, we'll discuss those factors, the benefits and drawbacks of incorporating, what to consider, and a few questions you can ask yourself to determine the right choice for your business.


Key Highlights


  • Incorporating your business can provide safety and tax advantages.

  • The decision to incorporate depends on factors such as your revenue, growth plans, and personal income needs.

  • The right time to incorporate is usually when your net income exceeds a certain threshold and you have the financial resources to handle the costs of incorporation.


Sole Proprietorship vs. Corporation vs. Partnership


When considering whether to incorporate your business, it's important to understand the basics of each business structure. There are generally 3 options:


  • Sole proprietorship: A sole proprietorship involves one person who is personally liable for the debts and obligations of the business. In this case, you and your business are essentially the same legal entity, and you will pay your taxes via your personal tax return.


  • Corporation: A corporation separates the business from the people who own it. The business is a separate entity, and the owners are not personally liable for the debts and obligations of the corporation. The business is required to pay corporate taxes, while the owners pay their personal taxes separately.


  • Partnership: A partnership involves two or more parties who share ownership of the business. Most of the time, partners share equally in liability. The structure is similar to a sole proprietorship, but with more people. Each partner will pay taxes via their personal tax return, based on their share of the business income.


What Are The Benefits of Incorporating Your Business?


Incorporating your business offers a few key benefits, but they are not always black and white! Let's dive into the potential benefits and when they might make sense for you.


Benefit 1: Legal Protection


As a shareholder of a corporation, your liability is generally limited to your investment in the business. This means that your personal assets are not typically at risk in the event of lawsuits or business debts. Your liability is confined to the amount of money you have invested in the corporation.


On the other hand, in a sole proprietorship or partnership, there is no legal separation between you and the business. This means that you (and your partners) are personally liable for the debts and obligations of the business. If the business is sued or faces financial difficulties, the owner and partners may be at risk of losing personal assets.


Incorporating your business can provide peace of mind by protecting your personal assets and shielding them from the liabilities of the corporation. This can be especially important if your business operates in a high-risk industry or faces potential legal challenges.


Benefit 2: Tax Advantages and Savings


Incorporating your business can also offer tax advantages and savings. Corporations are subject to a different tax rate than sole proprietors. The corporate tax rate is usually lower than the personal tax rate, especially for small businesses.


Incorporating your business also offers flexibility in managing your income and tax liabilities. As a shareholder of a corporation, you can choose to receive income as a salary or dividends. This can allow for strategic tax planning and potentially lower your overall tax burden.


So, why doesn't everyone just incorporate? The potential tax savings depend on your income level, and come with other administrative requirements and fees. 

In the following section, we'll break this down.


Corporate Tax Rates vs. Personal Tax Rates


As a sole proprietor or partnership, you will pay your taxes personally, using Form T2125. On the form, you will need to distinguish between business vs. professional income, and enter your total income for the tax year. Then, you will be taxed according to self-employed tax rates. The following table breaks down the federal self-employed tax rates in 2024, which will be paid in addition to the provincial self-employed tax rate, CPP contributions, and sales tax if applicable.


Income

Federal Self-Employed Tax Rate

Up to  $55,867

15%

$55,867 up to $111,733

20.5%

$111,733 up to $173,205

26%

$173,205 up to $246,752

29%

Over $246,752

33%


On the other hand, corporations will be required to pay corporate taxes, which are distinct from personal taxes. As the owner of a corporation, you will need to file your business' T2 Corporation Income Tax Return, in addition to your T1 Personal Income Tax Return

For businesses with income under $500,000, the corporate federal tax rates are 15%, and the provincial corporate tax rates are as follows:


Province

Provincial Corporate Tax Rate 2024

Newfoundland and Labrador


3%

Nova Scotia

2.5%

New Brunswick

2.5%

Prince Edward Island

1%

Ontario

3.2%

Manitoba

0%

Saskatchewan

1%

British Columbia

2%

Nunavut

3%

Northwest Territories

2%

Yukon

0%

Quebec

3.2%

Alberta

2%

Potential Drawbacks To Consider Before Incorporating?


Even if you've determined that incorporation would lead to lower tax rates for your business, it's important to consider the other implications. There are other expenses and requirements that should be assessed before making your final decision, including:



  • Legal fees: Depending on the size of your business, you may need to hire a lawyer to assist with the incorporation process.


  • Accounting costs: Maintaining a corporation often requires more extensive accounting and record-keeping compared to a sole proprietorship. This can result in higher accounting costs, especially if you require professional assistance.


  • Administrative costs: Corporations have ongoing administrative responsibilities, such as preparing and filing annual reports, maintaining corporate records, and complying with regulatory requirements. These administrative tasks may also require professional assistance, resulting in additional costs.


  • Incorporation fees: There are fees associated with incorporating your business, which can vary depending on the province and the type of corporation you choose. These fees cover the registration and filing of legal documents.


Another drawback may be the time needed to do the incorporation, take care of the new administrative requirements, and to file 2 tax returns instead of just one. It's important to consider these fees and time investment, especially if your tax savings are marginal. 

You can also increase your efficiency as a corporation or self-employed entrepreneur by using automated accounting software to cut down on your bookkeeping labour and mitigate some of the costs mentioned above.


at what income level should i incorporate

The Right Time to Incorporate


Determining the right time to incorporate your business depends on several factors, including your net income, growth plans, and personal income needs. While there is no one-size-fits-all answer, there are key considerations that can help guide your decision.

Here are a few questions to ask yourself:


  • Is my business' net income above or below $60,000?

  • If your income is above $60,000, it's likely that the corporate tax rate would save you money, and worth considering more seriously.


  • Do I have plans for growth and expansion?

  • Incorporating could provide more funding opportunities and set you up to scale. If you intend to grow quickly, you may want to get it out of the way earlier rather than later.


  • How much personal income do I need?

  • As a corporation, you will need to pay yourself via salary or dividends. Understanding how much you will need for your personal expenses, and how you will set those payments up, is helpful before completing an incorporation.


Conclusion


In conclusion, deciding when to incorporate your business involves a careful evaluation of your revenue, growth plans, and personal income needs. The benefits vary based on your income, and it could involve additional paperwork and fees. In general, if your business has income over $60,000, it's likely worth taking more time to consider incorporating, due to the legal protection and tax advantages that you would be able to take advantage of.

Whether or not your business is incorporated, you can still take advantage of tax deductions and write-offs! Don't wait to incorporate before focusing on tax planning and accounting optimization.


Frequently Asked Questions


At what revenue point should I consider incorporation?


Generally, when your business income reaches around $60,000, it's a good time to start considering incorporation. At this point, the tax rate as a corporation will likely be comparable or lower than your personal/self-employed tax rate.


How does incorporation affect my personal liability?


Incorporation typically limits personal liability, safeguarding personal assets from business debts. Unlike sole proprietorships, corporations offer legal protection to shareholders where personal assets are generally protected. This can certainly be a benefit as your business grows.


Can I incorporate if I am the sole owner?


Yes, you can incorporate your business even if you are the sole owner. Choosing to incorporate provides legal protection and tax benefits that can be advantageous even for a single owner.

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