As financial advisors, we often get asked by entrepreneurs and professionals whether they should incorporate their business. While incorporation can offer advantages, it’s not always the right choice for everyone. Here are a few things to consider before making this important decision.

The advantages of incorporating

1. Tax deferral opportunities: One of the biggest benefits comes when you can leave money in your corporation. Small business income is taxed at about 12% within the corporation, compared to personal tax rates that can be significantly higher. This means more money available for investment and growth within your business.
2. Creditor protection: Incorporation provides a layer of protection, separating your personal assets from your business liabilities. This is particularly important for professionals like chiropractors or others in higher-risk industries.
3. Income flexibility: Incorporation allows you to choose how you withdraw money from your business — through salary, dividends or a combination of both. This flexibility can help optimize your tax situation.

Drawbacks to consider

1. Setup and ongoing costs: Incorporating involves initial legal fees and ongoing accounting costs. These expenses can be in the range of several thousand dollars annually for tax preparation and compliance.
2. Added complexity: Corporate tax returns, annual filings and more complex estate planning are all part of maintaining a corporation.

When incorporation might make sense

The decision often comes down to one key question: Will you leave significant earnings within the corporation? If you’re earning $150,000 but need $145,000 for living expenses, paying incorporation costs to shelter $5,000 likely isn’t worthwhile unless you need creditor protection.

However, if you can leave $20,000-$40,000 in the corporation annually, the tax advantages become more meaningful. That money can grow more quickly at the lower corporate tax rate compared to personal tax rates.

The bottom line

While incorporation offers advantages, it’s not necessary for every business owner. Consider your specific situation, including:

• How much income you’re likely to retain in the business
• Whether you need creditor protection
• If the ongoing costs are justified by the benefits
• Your business growth plans

Remember, successful businesses can thrive under either structure. The key is choosing the option that best aligns with your financial situation and business goals.

If you’d like more personalized advice on managing your business or personal finances, don’t hesitate to reach out to us anytime. We’re here to help you navigate these important decisions.