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When should you incorporate your business?

December 09, 2023

By Eve-Marie Gigantes

Your personal business has grown significantly. Maybe it’s time to start thinking about incorporating it, even if you’re the sole owner. You could benefit from interesting tax advantages and reduce your financial and legal risk exposure.

Incorporation consists in creating a corporation that is a “legal entity”, separate from its owners and directors. It has its own property and debts, can sue and be sued. As such, the personal liability of the shareholders is limited to the value of their shares, barring a few exceptional cases.

You can incorporate your business provincially or federally. When is it the right time to do this? Generally:

– When your business operates in a field where the risk of lawsuits is relatively high;

– When your business qualifies for corporate subsidies or tax credits (or that are more advantageous when claimed by a corporation, such as investment tax credits);

– When your business generates earnings substantially higher than what you need to live.

Numerous tax advantages

If you operate a personal business, your taxes will be significant if your earnings are high because these are added to your personal income. If your taxable income is over $142,353 in 2017, your combined provincial (Quebec) and federal tax rate will be close to 50% of your income in this bracket and will exceed 53% on income over $202,800.

In comparison, in 2017, the combined tax rate of an eligible corporation was 18% on the first $500,000 of active business income (14% if the SME operates in the primary or manufacturing sectors), and 26.8% on income exceeding this level.

There are many other tax benefits to incorporation, such as:

– An individual who owns shares of a small business corporation may, under certain conditions, be entitled to an exemption of $835,716 (ceiling of 2017) on the capital gain resulting from the sale of his/her company shares. Moreover, if your spouse also owns shares, the exemption amount could double for the couple.

– According to tax rates in effect and depending on a shareholder’s specific needs, he or she might benefit, tax-wise, from opting for compensation in the form of dividends or a salary-dividend mix.

A few disadvantages

Creating and operating a corporation involves administrative obligations that come with a cost. Other than the initial costs of incorporating the company (make sure to call on specialists), there are annual expenses to prepare financial statements and income tax returns. These costs are usually higher than for a personal business.

For more information about the different legal forms of enterprises, go to these websites: Quebec government, Government of Canada or Educaloi. Also, don’t hesitate to contact our experts. It will be their pleasure to help you!