Self-employed: when does incorporating make sense?

How the two differ, in three steps

1. 1A sole proprietor is the business. There is no separate legal entity. The profit is taxed on your personal return, and the business's risks can reach your personal assets.
2. 2A corporation is a separate legal entity. It files its own return and pays its own tax. You take money out as salary or dividends, which are taxed to you personally.
3. 3Incorporating can defer tax. Profit you leave in the company is generally taxed at a lower corporate rate until you take it out. The costs are more accounting and more rules.

You can usually move a sole proprietorship into a corporation tax-free, by transferring the assets at fair market value, so the decision is not locked in.

Which way does it lean?

The honest catches

• It is not a tax cut. If you take all the profit out each year, the total tax is close to what you would pay as a sole proprietor. The benefit is timing.
• Costs are real. Accounting, annual filings and payroll or dividend paperwork add up.
• Contractors take care. If you work much like an employee for one client, check the personal services business rules before incorporating.
• Corporate tax is not modelled here. Ask an accountant to compare both for your numbers.

This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.