Introduction
You're building a successful business. Gross revenue is climbing. Now the question: Should you incorporate, or stay self-employed?
The answer: It depends on your income level, business structure, and long-term goals.
For businesses earning $40,000-$80,000, staying self-employed is usually best. For businesses earning $100,000+, incorporation often makes sense. In the middle range, it's a close call.
This guide walks through the financial math, the pros and cons, and helps you decide what's right for your situation.
The Tax Basics
Self-Employed Structure
You operate as sole proprietor:
- Income flows through to you personally
- Taxed at personal marginal rate (30-53% in Ontario, depending on income)
- Deductions reduce your personal taxable income
- Losses offset other personal income
- Simple to set up and maintain
Corporate Structure
You incorporate, create a company:
- Company is separate legal entity
- Company income taxed at corporate rate (~26% in Ontario)
- You take salary/dividends from company
- Can defer income (keep profits in company)
- More complex accounting and legal
The Math: Self-Employed vs. Corporate
Let's work through scenarios to understand where each works best.
Scenario 1: $50,000 Net Income
Self-Employed:
- Net income: $50,000
- Personal tax (marginal rate ~30%): $15,000
- Take-home: $35,000
- Tax cost: 30%
Corporate (salary strategy):
- Company income: $50,000
- Pay yourself $50,000 salary
- Company tax: $0 (salary fully deductible)
- Personal tax on salary: $15,000
- Take-home: $35,000
- Total tax: 30%
Result: No tax advantage to incorporating at $50,000 income.
Scenario 2: $100,000 Net Income
Self-Employed:
- Net income: $100,000
- Personal tax (marginal rate ~43%): $43,000
- Take-home: $57,000
- Tax cost: 43%
Corporate (mixed salary/dividend strategy):
- Company income: $100,000
- Pay yourself $50,000 salary
- Company retains $50,000 as profit
- Corporate tax on $50,000: ~$13,000
- Profit after tax: $37,000
- You take salary: $50,000
- You take dividend: $37,000
- Personal tax on salary ($50,000): $15,000
- Personal tax on dividend ($37,000): ~$9,000
- Total personal tax: $24,000
- Total tax (corporate + personal): $24,000 + $13,000 = $37,000
- Take-home: $100,000 – $37,000 = $63,000
- Total tax: 37%
Result: Incorporating saves ~$6,000 on $100,000 income (6% savings).
Scenario 3: $150,000 Net Income (Not Reinvested)
Self-Employed:
- Net income: $150,000
- Personal tax (marginal rate ~43%): $64,500
- Take-home: $85,500
Corporate (salary to minimize tax):
- Company income: $150,000
- Pay yourself $150,000 salary (fully deductible)
- Company tax: $0
- Personal tax on salary: $64,500
- Take-home: $85,500
Result: No savings (salary strategy results in same tax as self-employed).
But if you retain earnings in corporation:
Corporate (optimal mix):
- Pay yourself $75,000 salary (tax: $22,500)
- Retain $75,000 in company (corporate tax: $19,500)
- Profit after tax in company: $55,500
- Total tax: $22,500 + $19,500 = $42,000
- Take-home now: $75,000 (salary)
- Retained in company: $55,500
- Total personal + corporate tax: 28% (vs. 43% as self-employed)
The catch: You don't get this money now. It stays in company.
Advantage: Defer taxes until you withdraw (income splitting, estate planning, reinvestment).
Tax Advantages of Incorporating
Advantage 1: Income Deferral
Most valuable advantage: You don't have to take all profits personally.
- Keep $50,000 in company (tax 26%)
- vs. take personally (tax 43%)
- Difference: 17% tax savings on retained amount
Over 10 years, this compounds:
- $50,000/year retained in company = $500,000
- At 17% savings = $85,000 saved through deferral
This money can be reinvested in business, building asset base.
Advantage 2: Income Splitting
With corporation, you can split income with family:
- Spouse (or adult children) becomes shareholder
- Company pays dividend to spouse
- Spouse taxed at lower personal rate (if lower income)
- Net family tax savings
Example:
- Couple: You earn $150,000, spouse earns $30,000
- Marginal rate difference: 43% vs. 26% = 17% gap
- Company pays $20,000 dividend to spouse
- Tax on dividend (spouse's rate 26%): $5,200
- vs. If you take it (43%): $8,600
- Tax savings: $3,400
Advantage 3: Estate Planning
If you pass away:
- Self-employed: Business value in your estate, full capital gains tax
- Corporation: Company continues, valuation frozen, heirs can restructure
Advantage 4: Lower Personal Tax Rates on Dividends
Dividend tax credit in Canada means:
- Eligible dividends taxed at lower rate than salary
- At higher income levels, dividend rate: ~30% (vs. salary rate: 43%)
This makes it efficient to take profits as dividends.
Disadvantages of Incorporating
Disadvantage 1: Accounting & Legal Costs
Incorporating requires:
- Legal fees to incorporate: $1,500-$3,000
- Accounting fees annually: $1,500-$3,500
- Separate tax return: $500-$1,500
- Annual compliance: $500-$1,000
Total annual cost: $4,000-$9,000
For a business earning only $60,000, these costs eat up any tax savings.
Disadvantage 2: More Complex Tax Return
Corporate tax return is more complex:
- Corporate return: 20-30 pages, multiple schedules
- Personal return: 5-10 pages
- Requires specialist tax accountant (not DIY)
Disadvantage 3: Complexity When Selling Business
When you sell incorporated business:
- Corporate capital gains tax (on sale price vs. cost)
- Personal capital gains on shares (when you sell shares)
- Double taxation potential
vs. Self-employed sole proprietor:
- Capital gain on business value (tax on difference between cost and sale price)
- Single layer of tax
Disadvantage 4: Payroll Requirements
If you pay yourself salary:
- Must deduct CPP contributions (11.9% of salary, split between employee/employer)
- Must remit payroll taxes monthly
- Must file T4 slip
- More complex than self-employed CPP (self-employed pay full 11.9%, deductible)
Disadvantage 5: Loss of Deductions
Some deductions available to self-employed NOT available to corporations:
- Home office deduction (simplified, but available to self-employed)
- Vehicle expenses (some differences in treatment)
- Professional development (some restrictions in corp)
When to Incorporate: The Decision Framework
Incorporate if:
✓ Business income consistently $100,000+
✓ Significant profit that won't be withdrawn (reinvestment plan)
✓ Long-term business (planning to hold 10+ years)
✓ Interest in income splitting with family
✓ Estate planning considerations
✓ Multiple business ventures (corporate structure for liability)
✓ You plan to sell business eventually
Stay Self-Employed if:
✓ Business income under $80,000
✓ You withdraw all profits annually
✓ Business volatile (losses some years)
✓ You want simplicity
✓ You plan to exit soon (5 years)
✓ You have other significant income (making corp less valuable)
Consider Hybrid (Self-Employed Now, Incorporate Later):
✓ Business income $80,000-$120,000
✓ Testing business model (uncertain if it will scale)
✓ Waiting to see if income trend is sustainable
Real-World Example
Business owner in Ontario, age 40
- Current: Self-employed, $110,000 net income
- Situation: Reinvesting most profits, planning to build bigger business
Self-Employed scenario:
- Net income: $110,000
- Personal tax (43.4%): $47,740
- CPP contributions (self-employed): $3,867
- Total tax: $51,607
- Take-home: $58,393
- Amount available for reinvestment: $5,000 (personal savings capacity)
Incorporated scenario:
- Company income: $110,000
- Salary to self: $60,000
- Retained earnings: $50,000
- Tax on salary ($60,000): $26,040
- Tax on retained ($50,000 at 26% corporate rate): $13,000
- Total tax: $39,040
- Take-home: $60,000
- Amount retained in company: $37,000 (available for reinvestment)
Comparison:
- Tax savings: $12,567 annually
- Reinvestment capacity: $37,000 vs. $5,000 = $32,000 more available
Over 10 years:
- Tax savings: $125,670
- Reinvestment advantage: $320,000+ additional capital
This makes incorporation worthwhile for this entrepreneur.
Action Steps
If You're Self-Employed Earning $60,000-$100,000:
1. Calculate your actual tax rate (consult accountant)
2. Estimate incorporation costs ($6,000-$8,000 annually)
3. Compare: Tax savings vs. accounting costs
4. Decision: Likely stay self-employed unless significant reinvestment
If You're Self-Employed Earning $100,000+:
1. Get professional incorporation analysis ($1,000-$2,000 investment)
2. Model tax scenarios (self-employed vs. corporate)
3. Consider your reinvestment plan (staying in company vs. withdrawing)
4. Plan incorporation timing (mid-year vs. year-start)
5. Decide: Likely worth incorporating
If You're Self-Employed Earning $150,000+:
1. Incorporate almost certainly (massive tax deferral advantage)
2. Plan income splitting strategy (family shareholding)
3. Set up dividend strategy (optimal mix of salary/dividends)
4. Plan for eventual sale (corp structure helps)
Conclusion
The decision to incorporate isn't one-size-fits-all. It depends on your income level, reinvestment plans, and goals.
For most mid-income business owners, the breakeven is around $100,000 in annual income. Below that, stay self-employed. Above that, incorporate.
Get professional analysis ($1,000-$2,000) to determine your specific situation. This investment pays for itself many times over in tax savings.
Related Articles
- Article 2: RRSP Strategies for Tech Workers in Ottawa
- Article 5: Real Estate Investment Tax Strategies Guide
- Article 17: Stock Options Tax Planning for Employees
Sources & References
- CRA Self-Employment Income Rules
- CRA Corporate Tax Rates Ontario
- CPA Canada Incorporation Guide
- Ontario Business Registry
- Service Canada CPP Self-Employment
- Government of Canada Small Business
- Canadian Payroll Association
- BDC Incorporation Guide
- Law Society of Ontario – Business Lawyers
- Ministry of Finance Ontario
