The first question that arises as a self-employed individual. Like many other things, the answer is never black or white. In fact, there are several aspects to be assessed before deciding whether incorporation is advantageous or not.
Let's start with the basics. When a person gets into business, they have the choice to be considered as a sole owner or to create a corporation. Under Canadian law, a corporation has the same rights and obligations as a natural person. This is what constitutes the first advantage of incorporation: since the company is regarded as a legal person, it has a separate existence from that of its shareholders. Thus, liability is limited to the initial investment in the case of a bankruptcy. However, it should be noted that this advantage is often offset by the fact that creditors require legal safeguards against the assets of the main shareholder.
So what is the main advantage of incorporation? Saving money! In fact, the company is subject to a lower tax rate than the individual, especially if it is a private corporation under Canadian control. It will thus have the right to claim the small businesses deduction on the first $ 500,000 of the company's income. That portion is taxed at a combined rate of only 19%!
The company can also decide its method of payment by paying a portion as salary, and the rest as dividends, while finding the most advantageous combination – a whole other debate!
It is also possible to pay dividends to other people, usually the children of the principal shareholder, which often have low incomes and are therefore taxed at a lower rate. This is called income splitting.
Finally, another advantage not to be forgotten is the tax deferral. In fact, you can decide to keep the funds in the company rather than to withdraw it as a salary or a dividend, something you cannot do with an individual company. The money accumulated over the years can be an excellent pension fund!
Now that I have highlighted all the benefits related to incorporation, one must not forget all the implications of incorporating, In fact, the start-up costs are way higher. These costs include legal fees for the registration of the name of the company, the shareholders' agreement, the incorporation to the Registrar of companies in Quebec. We must not forget the accounting fees for the production of financial statements and for the tax return (the company must file its own tax return, different from the personal tax return of the shareholder). There are also many increased formalities along with a more complex structure.
Finally, as you can see, there is no simple rule for incorporation. In my opinion, it is advantageous to incorporate your company only if your standard of living is less than the income generated by your company. Therefore, you can enjoy all the benefits such as tax deferral by keeping some money in the company, since it is taxed at a lower rate than an individual.