Starting and running a business in Ontario comes with plenty of decisions—one of the biggest being whether to incorporate. For many entrepreneurs, incorporation feels like a milestone, a signal that the business has “made it.” But is it the right move for you? Let’s break down the pros and cons of incorporating your Ontario business so you can make an informed choice.
What Does Incorporation Mean?
Incorporation is the process of creating a separate legal entity for your business under federal or provincial law. This new corporation can own property, enter contracts, earn income, and pay taxes independently of you, the owner. Unlike a sole proprietorship or partnership, a corporation has its own legal identity.
The Pros of Incorporation an Ontario Business
- Limited Liability
As a corporation, your personal assets are generally protected from business debts and lawsuits. Creditors can only go after the assets of the company, not your personal home or savings (as long as you’re operating within the law).
- Tax Advantages
Ontario corporations benefit from a lower small business tax rate compared to personal income tax. The current small business rate can be significantly less than what you’d pay as an individual once your business income grows. Incorporation also allows for tax deferral—leaving money in the corporation to be taxed at a lower rate until you withdraw it.
- Credibility and Growth Opportunities
Incorporating can make your business appear more established and trustworthy to clients, lenders, and investors. If you plan to seek outside investment or eventually sell your business, a corporate structure is typically more attractive.
- Income Splitting
While rules have tightened in recent years, there are still opportunities to split income with family members who work in the business, reducing your overall family tax burden.
The Cons of Incorporation
- Setup and Ongoing Costs
Incorporating isn’t free. There are government filing fees, legal costs, and ongoing expenses for maintaining corporate records, filing corporate tax returns, and possibly hiring professionals to handle compliance.
- More Administration
As a sole proprietor, you simply report your income on your personal tax return. A corporation, however, must keep detailed records, hold shareholder meetings, and file annual returns. For some small businesses, this extra paperwork can feel overwhelming.
- Losses Can’t Be Claimed Personally
If your incorporated business runs at a loss, those losses can’t offset your personal income. As a sole proprietor, business losses can reduce your taxable income, which is helpful in the early years.
- Double Taxation on Withdrawals
Profits left in the company are taxed at a lower rate, but once you pay yourself dividends or salary, you’ll face personal tax. While there are ways to plan around this, it adds complexity.
So, Should You Incorporate?
The decision largely depends on your business’s size, profitability, and long-term goals. If your business is still small, generating modest income, and you prefer simplicity, remaining a sole proprietor may be best for now. But if your profits are growing, you want liability protection, and you’re thinking long-term, incorporation can be a smart move.
At the end of the day, every business is different. A consultation with a qualified accountant can help you weigh the numbers and determine the best path forward for your Ontario business.