Should I incorporate if I'm self-employed?

In Quebec, being self-employed is often synonymous with freedom and flexibility. But as your business grows, one question keeps coming up: should you incorporate? This decision, far from being trivial, can mark a turning point in your entrepreneurial career.

Our experienced tax accountants have put together a range of essential information to help you decide whether incorporation is the right path for you as a self-employed person.

Self-employment vs. corporation: what's the difference?

The fundamental difference between a self-employed worker and a corporation lies in the distinction made between the owner and the business

Think of the self-employed person as a soloist, master of his art but fully responsible for his performance. His earnings are his personal income, and his debts are individual obligations. In contrast, a corporation is a finely tuned orchestra, a separate entity that plays by different rules. Its debts are not your debts, and its successes reverberate beyond personal boundaries.

But that's not the only difference between a sole proprietorship and a corporation. See the benefits of incorporation to better understand the differences.

What are the benefits of incorporation?

Incorporation offers several significant advantages, particularly for the self-employed and small businesses.

A legal shield for your assets

Imagine that your business faces financial challenges. As a self-employed person, your personal assets could be at risk to pay its debts.

Incorporation changes all that. It creates a clear separation between your personal finances and those of your business. If your business faces litigation or debt, your personal assets, such as your home or savings, are protected.

If your business generates more and more taxable income, incorporating your business becomes essential. This is especially true for those who take business risks but want to preserve their family's financial security.

Tax savings and financial opportunities

As a self-employed person, you know that your income is taxed according to the personal income tax table. This is based on a progressive structure of four income brackets. The higher your annual profits, the higher your taxable amount.

By choosing to incorporate, you benefit from a tax table that is tailored to companies and their problems. In particular, the measure known as the Small Business Deduction (SBD) allows eligible SMEs to benefit from a lower tax rate on the first $500,000 of taxable income.  In addition, certain business expenses are allowed that can also reduce the tax burden. These include certain types of travel, entertainment and equipment expenses.

 For a self-employed person considering incorporation, these tax advantages can be a deciding factor, especially if you're growing or generating significant income.

Broader tax optimization

Tax optimization goes beyond simple tax savings. It involves strategic planning to maximize tax benefits while complying with the law.

For example, a corporation may choose to keep some of its profits in the business, thereby reducing the owner's personal taxable income. This can be particularly beneficial for those who do not need all of their profits for personal expenses and wish to reinvest in their business. It is also possible to plan compensation through a mix of salary and dividends to further optimize the tax situation.

There are many ways to make the profits from your business work for you. If you're interested, take a look at our "Should I Incorporate?". A free guide and consultation is available to help you better understand the benefits of incorporation for your situation.

What are the disadvantages of incorporation for the self-employed?

Incorporation offers many advantages, but it's also important to consider the potential disadvantages.

Depending on how much you earn, the cost of incorporation or management restrictions may be an obstacle. Knowing and understanding these constraints will help you determine whether they are relevant to your business.

Initial costs and expenses

Incorporation involves significant upfront costs. These include legal fees to set up the company, filing fees, and possibly accountant or lawyer fees to ensure everything is set up correctly. These costs can be an obstacle, especially for small businesses or sole proprietors with limited financial resources.

Administrative & regulatory requirements

An incorporated business must comply with more stringent regulatory requirements than those imposed on the self-employed. These include keeping detailed records, preparing and filing corporate tax returns, and possibly holding annual meetings and taking minutes. This additional administrative complexity may require more time or the hiring of specialized staff, increasing operating costs.

How do I decide whether to remain self-employed or incorporate?

The decision to remain self-employed or incorporate ultimately depends on your financial situation, professional goals and personal preferences.

Here are some things to consider to help you make an informed decision:

Business goals

Consider your long-term goals as an entrepreneur. If you plan to grow your business significantly, incorporation can provide a more solid structure for achieving your ambitions. It may also make your business more attractive to potential investors.

Financial situation

Evaluate your current and future financial situation. Incorporation can offer significant tax benefits, but it also involves upfront costs and ongoing obligations. Make sure you have the resources to manage these costs and obligations.

Personal liability

Consider the benefits of limiting personal liability through incorporation. If you're concerned about high legal risks in your business, incorporation may offer greater protection for your personal assets.

Financial management

Consider how you want to manage the finances of your business. Incorporation offers greater flexibility in the choice of remuneration and the possibility of distributing income in a tax-efficient manner.

Tax planning

Consult a tax professional to develop an appropriate tax strategy. He or she can help you optimize the tax advantages of incorporation and minimize potential tax disadvantages.

Thinking about incorporating your business?

Incorporation can be a turning point in your entrepreneurial journey, but it requires a careful assessment of your current and future needs. There is no one-size-fits-all answer to this question, as each situation is unique. By carefully weighing the pros and cons, carefully planning your financial management, and seeking professional advice, you'll be able to make the decision that best suits your needs and goals.

T2inc.ca has assembled a team of professionals to answer all your questions and provide you with the help you need. And with our online incorporation service, incorporating has never been easier. With just a few clicks, our accountants, assisted by specialist lawyers, will take care of your file to take your business to the next level.