“If you’re trying to create a company, it’s like baking a cake. You have to have all the ingredients in the right proportion.”
– Elon Musk

Incorporation 101:

A lot of professionals have their own businesses. If you have one, you’ve probably wondered about whether or not to incorporate. If your business is growing, it’s likely more a question of “when” rather than “if”.

There are no formal rules as to when to take the plunge. It really should be tailored to each individual situation and depends on factors such as:

* Personal Liability – Once incorporated, typically only your corporate assets can fall victim to creditors or lawsuits. These third parties will not have as much ability to threaten your personal finances.

* Income Splitting – Does your significant other fall in a lower personal income tax bracket? A corporation can become a way to even out your personal incomes to reduce the overall tax burden on your family.

* Deferring Income – If you don’t need all the money that your business is making in any given year, you can keep the extra in the company for as long as you would like before having to bear the burden of personal taxes. This often allows you to delay tax payments until you fall in a lower tax bracket which leads to overall tax savings.

Pros & Cons:

Let’s break this down:


Reduces Personal Liability: If an unincorporated business hits rough financial waters and you can’t pay your bills, creditors can go after your personal assets (house, bank accounts, etc). Corporations are considered separate legal entities, so your creditors will typically go after your corporation and its assets, not you and your personal assets.

You have Options: With an unincorporated business you have one way to get paid, and the taxman knows it. In a corporation you have a choice between salary, dividends, bonus or a combination, whichever is the most tax efficient. You can also take advantage of income splitting (Income Splitting Article).

Defer Your Taxes: If you don’t need business earnings for personal use, you can leave them in the business and defer your personal tax.

Debt Repayment: If purchasing an existing business, incorporation of a holding company may allow you to make your debt repayments to the vendor on a tax-preferred basis.

Employee Benefits: You’ll have more tax-favourable options to offer tax-free benefits to your employees to increase retention and attract the best candidates.


Fees: You’ll need a lawyer and an accountant to incorporate, so plan to incur some professional service and filing fees. However, it pays for itself quickly (often in just a year or two) in tax savings. Remember that you get what you pay for, and going for the cheapest consultants won’t maximize your advantages.

Can’t Claim Losses: The shield against your personal assets goes both ways. If your business fails, you’ll only be able to write off the amount you invested personally against your personal income, not the corporation’s accumulated losses.

There’s Paperwork: You’ll need to file a separate tax return, an annual return, etc. It’s standard stuff, but you’ll need to be another level of organized if you’re going to do it yourself. Finding the right professional advisors to help guide you through these additional challenges will definitely be a worthwhile exercise.

How to Get it Done:

This is one of the biggest steps of your professional life, so find a qualified professional who won’t rush you, but will take the time to discover the opportunities that your personal situation allows. Every individual (and their business) is unique, so the structure and ownership of every corporation will be different. Take the time up front to ensure your accountant gets to know where you’re coming from, and more importantly, where you’re going. The proper foundation will help your business ensure both its current and future success.