When Should You Incorporate a Business in Canada?

TL;DR

There’s no magic number or one-size-fits-all answer in determining when to incorporate your business. In fact, if someone tells you there’s a magic number where incorporation always makes sense, they haven’t factored in the uniqueness of your situation. The real answer, as always, is that it depends on a wide variety of things, but for most, it’s 1 of these 2:

  • Profitability: If you’re making more than you need personally and can leave around $20,000 or more inside the business each year, you could likely benefit from lower corporate tax rates.
  • Liability: Incorporation can help protect your personal assets if your business faces legal or financial risks.

If you’re thinking about incorporating but still have questions, visit our VCFO page or book a YBL Insight Analysis. With this report, you’ll gain insights worth thousands in just days, replace guesswork with tailored, data-driven strategies, and start making informed decisions about your business’s future, starting now.

When Should You Incorporate a Business in Canada?

Incorporating your business is a big step—and a common question we hear at YBL is “When should I incorporate?”. There’s no one-size-fits-all answer. In fact, if someone tells you there’s a magic number where incorporation always makes sense, they’re not being honest. The real answer? It depends. But here’s what you should know.

The Two Big Reasons to Incorporate: Profitability and Liability

Most of the time, the decision to incorporate comes down to two things:

  • Profitability: You’re making more than you need to live off of.
  • Liability: You want to legally separate your business from your personal assets.

Let’s break those down.

Profitability: Can You Leave Money in the Business?

This is the most common reason to incorporate. The key question isn’t how much are you making? It’s can you afford to leave money in the business at the end of the year?

Why does that matter? Because money left in a corporation is taxed at a much lower rate than personal income. For example:

  • If you’re a sole proprietor earning $100,000, your marginal tax rate could be 30–40% (or more) depending on your province.
  • If you're incorporated and leave $100,000 in the business, the first ~$500,000 of active business income is taxed at the small business corporate rate—around 12.5% in Ontario.

That’s a potential tax deferral of $17,500 to $27,500 per year on $100K of income. Over time, that adds up.

💡 Let’s say you leave $30,000 in your corporation each year for 10 years. That’s $300,000 taxed at 12.5%. If you’d taken that personally, you might have paid 35%—an extra $67,500 in tax.

The money left in the business can be reinvested, used to buy assets, or simply saved and grow within the corp.

So How Do You Eventually Take That Money Out?

You have a few options when it's time to take the money out:

  1. Dividends: You can pay yourself dividends from your retained earnings. These are taxed personally, but since corporate taxes were already paid, there's a dividend tax credit that helps offset some of the personal tax.
  2. Payroll (Salary or Wages): You can pay yourself a salary from the corporation, just like you would an employee. The business gets a tax deduction for the salary paid, and you’ll pay personal income tax on the amount you receive. This approach also contributes to your RRSP room and CPP entitlements, which can be helpful for long-term planning.
  3. Management Fees: If you own another company or provide business services through a different entity, your corporation can pay you a management fee. This needs to be backed by a legitimate business relationship and proper documentation, but it’s another flexible way to move funds while also being deductible for the paying company.
  4. Capital Gains (if you sell your business): If you eventually sell your corporation, the proceeds could be taxed as a capital gain. You may even qualify for the
  5. Winding Down the Corporation: If you shut the business down, you can declare a final dividend and distribute retained earnings. You’ll pay personal tax at that time, but the lower corporate tax rate still gave you the benefit of tax deferral—and possibly investment growth—along the way.

So the real question is: Can you consistently leave money in the business without needing it for your personal life? If yes, incorporation can give you a serious tax advantage—especially long term—and offers flexibility in how and when you pay yourself.

Liability: Are You Exposed to Legal Risk?

The second major reason to incorporate is protection—specifically, protecting your personal assets from legal or financial risks tied to your business.

When you operate as a sole proprietor, you and your business are legally the same person. That means if your business is sued or can’t pay its debts, your personal assets—like your home, car, or savings—could be at risk.

Incorporating creates a separate legal entity. That separation can help shield you from personal liability, as long as the corporation is set up and operated properly.

Real-Life Examples:

  • Let’s say you're a contractor and something goes wrong on a job site. If a client takes legal action, your personal assets could be at risk unless your business is incorporated.
  • Or you're a consultant providing advice that a client claims caused them financial harm. Again, incorporation can provide a legal buffer.
  • Even small service businesses - photographers, coaches, therapists, or stylists - can run into issues over contracts, client disputes, or intellectual property claims.

In these cases, incorporation can limit how far a legal claim can reach.

The Fine Print: What Incorporation

That said, incorporation isn’t a silver bullet. It doesn't make you immune from personal liability in all cases.

  • If you sign a personal guarantee for a loan or lease, you’re still on the hook—even if you’re incorporated.
  • If you're negligent or intentionally do something wrong, incorporation won’t protect you.
  • If you're the only person in the corporation, courts may still “pierce the corporate veil” if it’s clear you and the corporation are not operating separately (e.g., mixing business and personal finances).

And most importantly: you still need business insurance. A corporation limits liability, but it doesn’t replace proper coverage.

When Liability Becomes a Real Factor

Incorporation makes more sense if:

  • You’re scaling up and hiring employees
  • You’re entering into larger or riskier contracts
  • You’re offering services where legal risk is a concern (e.g., advice, physical work, regulated industries)
  • You’re selling products to the public

The more exposure you have, the more protection you might need.

Other Reasons to Incorporate

Profitability and liability are the big two, but there are a few other reasons that might push you to incorporate:

  • You’re required to: Some contracts or clients only work with incorporated businesses.
  • You want to income split: Incorporation can give you more flexibility to pay dividends or payroll to family members in certain situations.*
  • You’re nearing retirement: Incorporating may help with income smoothing as you transition out of your business.

*Be careful of Tax on Split Income rules. Do not just arbitrarily pay your family without support for this.

These are just a few of the more common reasons we see—but there are many other strategic, industry-specific, and long-term planning considerations that might make incorporation worth exploring. Every business is different, and the best decision always depends on your unique circumstances.

Your Bottom Line

There’s no single sign that says it’s time to incorporate. It’s not just about hitting a certain income level or facing a specific risk. Incorporation is a strategic decision based on a mix of factors—profitability, liability, future goals, and your personal situation.

If you’re thinking about incorporating but still have questions, visit our VCFO page or book a YBL Insight Analysis. With this report, you will:

  • Gain insights worth thousands in just days, not years
  • Replace guesswork with tailored, data-driven strategies
  • Make informed decisions about your business’s future, starting now

Don’t leave one of your biggest business decisions up to chance—let’s build a plan that fits you.