The decision to incorporate or be self-employed can be tricky and there are many factors to consider. Each business is different, however there is often a net income amount where it becomes more tax efficient to incorporate.
Benefits to incorporating
- Lower tax rate – a small business deduction rate is available for income under $500,000 a year.
- Limited liability – your business is considered separate from you as an individual. It prevents individuals from being held personally responsible for their company’s debts or financial losses.
- Flexible year end – incorporated businesses can set a different year-end date. Businesses that are seasonal can often benefit from having a year-end date after busy season.
- Control over how profits are distributed – a portion of the profits can be distributed as wages or dividends. Whereas if you are self-employed, all income is taxed personally.
- More access to capital and loans – financial institutions are often more willing to provide loans and capital to an incorporated company.
- More than one owner – you can set up more than one shareholder or owner and divide the percentage of ownership. This is often advantageous for a family-run business where profits can be split between shareholders.
Downsides to incorporating
- Set up costs – to set up an incorporated company you will require a lawyer to set up the paperwork. Any changes to the company such as adding a shareholder or changing the name would also require more legal fees and reissuance of the paperwork.
- Complex tax returns and accounting fees – The accounting costs are higher for corporate tax returns and financial statements need to be prepared each fiscal year. If you have a high number of transactions, you may also require a bookkeeper.
- Cannot offset tax payable with personal tax credits on your corporate return. For example, in a sole proprietorship you could offset RRSP contributions or medical expenses to reduce your tax payable however these would have no impact on a corporate return.
To have a clearer understanding of your specific circumstances, Aire Tax and Business Solutions can complete a comparison of your tax payable if you incorporate vs being self-employed.
