Incorporation: when does it make sense for your business?

Are you self-employed or the owner of a sole proprietorship, and wondering whether it’s time to incorporate? Incorporation can be advantageous, but not in every situation. Here is what it changes, its possible advantages, its costs and the questions to ask yourself before deciding.

What incorporation changes

A corporation is a separate entity from you. It has its own accounts and files its own income tax returns every year (T2 federally and CO-17 in Québec). You become a shareholder, and you pay yourself through a salary, dividends or a combination of both. To learn more, see our guide “Salary or dividends”.

Possible advantages

• Tax deferral: profits left in the corporation can be taxed at the reduced small business rate, on the first $500,000 of eligible business income, if the conditions are met. You pay personal tax only when you withdraw the money. This is mainly a deferral, not necessarily a saving.
• Flexible compensation: each year, you choose the mix of salary and dividends that suits your situation.
• Limited liability: in general, the corporation’s debts are not yours. This protection has limits, however, such as personal guarantees you sign for a loan.
• Long-term planning: selling shares of a qualifying corporation may give access to the lifetime capital gains exemption, under strict conditions.

Costs and drawbacks

• Additional fees and obligations: incorporation fees, an annual updating declaration with the Registraire des entreprises (with fees), separate bookkeeping, financial statements and two corporate income tax returns every year.
• Start-up losses: a corporation’s losses stay in the corporation. They do not reduce your personal income.
• Little benefit if you withdraw everything: if you need all of the profits to live on, the tax deferral benefit is limited.
• Personal services business: if you work for a single client the way an employee would, the corporation may lose the reduced rate, pay additional tax and have limited deductions.
• Conditions for the reduced rate: in Québec, the reduced rate can depend on the number of hours paid in the corporation. Significant investment income in the corporation can also reduce access to the reduced rate.

When is incorporation generally worth considering?

Incorporation often becomes worthwhile when:

• your business is consistently profitable;
• your profits exceed what you need to live on;
• you have several clients and a genuine business activity;
• you plan to hire, expand or sell one day.

It is often less worthwhile at start-up, when the business is losing money or its income barely covers your personal expenses.

Questions to ask yourself

• How much profit does your business make, and how much do you need each year?
• How many clients do you have?
• Do you have employees, or plan to hire?
• Does your activity involve significant risks?
• Do you plan to sell or transfer your business one day?

How AM Comptable can help

We analyze your results and your personal situation to assess whether incorporation is advantageous for you. If you go ahead, we can take care of incorporating your company, then handle your bookkeeping, payroll and corporate tax returns. The first consultation is free.

This article provides general information. It does not replace advice tailored to your situation. Tax rules may change. Information current as of October 2026.