Should you incorporate? Look at where the money goes first

Plenty of owners incorporate because it sounds established. A corporation does bring real advantages. It also brings real costs every year: a corporate T2 return, books kept separately from yours, an annual report to the BC Registry, a bank account in the company’s name, and payroll or dividend paperwork every time you pay yourself.

Whether those costs are worth it depends less on how much the business makes than on where the money goes after it makes it. There are three common cases.

Case 1: you spend what you earn

Say the business brings in $100,000 in revenue and $70,000 in profit, and your household needs all $70,000 to live on.

This usually points to staying a sole proprietor. A corporation’s tax advantage applies to profit left inside it. Take everything out as salary or dividends and you pay personal tax on it anyway. The system is built so that the combined tax comes out roughly similar either way, and you have added the cost of a second set of books and filings.

Case 2: profit you do not need this year

Now say the business makes $200,000 in profit and you need $80,000 of it. The other $120,000 you would rather keep for next year’s equipment, a second location, or a cushion.

As a sole proprietor, all $200,000 goes on your personal return for the year, whether or not you touch it. The $120,000 you left in the account is stacked on top of the first $80,000, so it is taxed at the upper end of your brackets. In BC the marginal rate across that range climbs from around 30% to over 45%.

In a corporation, the first $500,000 of active business income is taxed at 11% combined: 9% federal plus 2% BC. You take $80,000 as salary or dividends and pay personal tax on that. The $120,000 left in the company is taxed at 11%, and the difference stays in the business to reinvest.

If the retained profit is invested rather than used in the business, one limit applies. Investment income above $50,000 a year starts to reduce access to the 11% rate.

Case 3: risk, not tax

Profit might be modest, say $50,000 to $60,000, but you are signing a five-year commercial lease, hiring staff, or working in construction, food service or on clients’ premises.

Here the argument for a corporation is not tax. A corporation is a separate legal person, so business debts and claims generally stop at the company rather than reaching your house and savings.

The shield has three gaps worth knowing before you rely on it:

• Personal guarantees. Landlords and banks routinely ask small-company owners to guarantee a lease or loan personally. Sign one and that debt is yours again.
• Director liability. Directors can be personally liable for unremitted payroll source deductions, GST and PST, and for certain unpaid wages.
• Your own actions. Incorporating does not protect you from your own negligence.

Much of the real protection comes from insurance: general liability, professional liability where it applies, and WorkSafeBC coverage for staff. For the structure itself, get legal advice.

What changes the day you incorporate

• A new business number, with new GST and PST accounts. The corporation is a new person, and the sole proprietorship’s accounts do not transfer to it.
• A bank account in the corporation’s name.
• A process for paying yourself, by payroll, dividends, or both.
• A T2 return every year, due within six months of the corporation’s year end, as well as your own personal return.
• An annual report to the BC Registry.
• Documented transfer of any assets moved from the sole proprietorship into the company.

Mixing business and personal money, including shareholder loans →

What running payroll in BC actually involves →

Get the books ready for a corporate year end →

Questions people ask

Run your own numbers first

If you consistently leave meaningful profit in the business, or carry risks that insurance alone does not comfortably cover, incorporating is worth a serious look. If you take out everything you make, the extra paperwork usually costs more than it saves. Either way, the answer comes from your actual numbers, not from how the business sounds.

Orbis Accounting keeps the books and files the returns for sole proprietors and corporations across Metro Vancouver, in English and Mandarin. Send us your last year’s numbers, and we show you what each structure looks like before you decide.

Bookkeeping vs tax filing: what each covers →