When to Consider Incorporating Your Small Business

As your small business starts to grow, you might wonder if it’s time to incorporate. Incorporation can offer several advantages, but it’s not the right choice for every business—and timing matters. In Canada, many entrepreneurs start as sole proprietors and choose to incorporate later, once the business reaches a certain stage.

If you’re on the fence, here’s what you need to know about when to consider incorporating and the pros and cons of making the move.

What Does Incorporation Mean?

Incorporating means creating a separate legal entity for your business—essentially turning your business into a corporation. This comes with legal, tax, and operational changes. While incorporation offers a new level of professionalism and protection, it also involves more paperwork and administrative responsibilities.

Pros of Incorporating in Canada

1. Limited Liability

One of the biggest advantages is protection of personal assets. If your corporation incurs debt or is sued, your personal assets are generally protected—unlike in a sole proprietorship where your personal and business finances are legally connected.

2. Potential Tax Advantages

Corporations are taxed separately from their owners and may benefit from a lower corporate tax rate, particularly on the first $500,000 of active business income, thanks to the Small Business Deduction (SBD).

You also gain the ability to leave money in the business and control how and when to pay yourself—through salary or dividends—allowing for more strategic tax planning.

3. Easier Access to Funding

Banks and investors often view incorporated businesses as more credible and stable. If you plan to raise money, apply for grants, or grow rapidly, incorporation could help open those doors.

4. Continuity

A corporation exists beyond the owner. This makes it easier to sell, transfer, or pass on the business, offering long-term planning benefits.

Cons of Incorporating

1. More Paperwork and Ongoing Costs

Corporations require separate accounting, corporate tax filings (T2), annual returns, and often a business number with CRA. Legal and accounting fees tend to be higher for incorporated businesses.

2. Less Simplicity

For small or seasonal businesses that don’t earn consistent income yet, the added complexity of incorporation might not be worth it—especially if you're not ready to take on the administrative demands.

3. Losses Can’t Be Applied to Personal Income

If your business experiences a loss as a sole proprietor, you can apply that loss to your personal tax return. Once incorporated, those losses stay within the corporation and can’t reduce your personal tax burden.

When Is the Right Time to Incorporate?

Consider incorporating your business when:

• You're earning consistent profits (e.g., $80,000+ annually)

• You want to limit personal liability

• You plan to hire employees or seek investors

• You’re ready to reinvest profits rather than withdraw them all personally

• You want to build long-term value and protect your brand

Talk to a Pro Before You Decide

Every business is different, and incorporation isn’t a one-size-fits-all decision. A qualified accountant can help you weigh the pros and cons based on your business’s unique situation, income level, and growth goals.

We’ll help you understand the financial and tax implications so you can make the best decision for your business now—and into the future.