Incorporating is a big step. For most Laval entrepreneurs, the question isn't whether to incorporate, but when. There's no single revenue number that decides it. Here are the factors that matter, and the signs that it's still too early.
The main reason: keeping profit in the company
A corporation pays tax on its own profit, and active business income of a Canadian-controlled private corporation is taxed at a reduced rate thanks to the small business deduction (federally, on the first $500,000 of active business income). If your business earns more than you need to live on, the profit you leave in the corporation is taxed at that lower rate until you pay it out. That deferral is where most of the benefit comes from.
If you need every dollar the business earns to pay your personal expenses, the advantage is much smaller, because the money gets taxed again in your hands when you take it out as salary or dividends.
Quebec has its own conditions
In Quebec, the provincial small business deduction comes with extra conditions, such as a minimum number of paid hours worked in the business for most sectors. A one-person service business may not get the full Quebec reduction, which changes the math. This is one of the first things we check.
Other good reasons to incorporate
- Limited liability: the corporation, not you personally, is generally responsible for business debts. Personal guarantees and professional liability can limit this, so it's not complete protection.
- Paying yourself flexibly: you can choose between salary and dividends, and the timing, to manage your personal tax. See salary vs. dividends.
- Selling the business later: shares of a qualifying small business corporation may be eligible for the lifetime capital gains exemption.
- Credibility: some clients and suppliers prefer to deal with an incorporated business.
What it costs to be incorporated
- Incorporation fees, federal or provincial, and registration with the Registraire des entreprises du Québec.
- An annual update declaration with the Registraire.
- Two corporate tax returns every year (federal T2 and Quebec CO-17) and year-end financial statements.
- Separate bank accounts and bookkeeping for the corporation.
These costs are worth it once the tax savings and protection are larger than them.
Signs it may be too early
- The business is losing money or just breaking even. Early losses can often be deducted against your other personal income if you are not incorporated.
- You take out everything the business earns.
- You're still testing whether the business will last.
Federal or Quebec incorporation?
You can incorporate under federal law or Quebec law. Both work for a business operating in Quebec, and either way you register with the Registraire des entreprises. The choice depends on name protection, where you plan to operate and your costs.
Get a straight answer for your situation
The right timing depends on your profit, what you need to live on, your sector and your plans. In a one-hour tax consultation ($125), we run the numbers with you and tell you whether incorporating makes sense now. When you're ready, we handle the corporate tax returns and bookkeeping at a fixed price.