When should I incorporate?

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Incorporating can be a great decision for a lot of people, but it’s a big decision. It introduces complexity and additional costs, but can bring significant savings depending on your situation. Incorporating too early can actually make you pay more in taxes, though. This blog post will help you decide when’s the right time for you.

Just want the answer? Download our incorporation checklist!

What is incorporating?

Incorporating means we set up a separate legal entity – a corporation – that you’ll run your practice through.

There are a lot of reasons to incorporate, but the main one for holistic healthcare practitioners is to save on taxes. Corporate tax rates are lower than personal tax rates, but the catch is that lower tax rate only applies to funds that stay in the corporation. So if you’re making $200,000 but saving all of it for a home down payment, then you’re not going to save any taxes by incorporating.

The key is that some people will save money by incorporating, while others might end up paying more. Here’s our checklist for when the timing might be better for you.

1. You’ve used up other ways to save on taxes

Incorporating can help save on taxes, but there are other ways that are easier and more cost effective. Here are some examples:

  • Tuition credits – It usually doesn’t make sense to incorporate until you’ve used up all your tuition credits. You can check your most recent tax return to see how many tuition credits you have left.

    • Tip: Learn more about tuition credits here.

  • RRSP/TFSA/FHSA – You maximize the benefit from incorporating the more you save. But if you have contribution room in your tax-sheltered plans like your RRSP, TFSA and FHSA, you should use that up before incorporating. Both incorporating and saving in tax-sheltered plans help you reduce your taxes, but incorporating is more complex and costly, so you want to do that last.

2. You’re saving a lot

This one usually trips people up. Even if you’re making $500,000 in your business, if you’re spending it all on your business or your personal lifestyle (like groceries, housing, and vacations), then you won’t actually save anything by incorporating. That’s because the amount of saving depends on how much money you have saved in your corporation each year.

Here are some milestones you should meet:

  • You have a high income – In general, you want to have income (your business revenue minus expenses) of at least $75-100,000.

  • You’re saving a lot for the long-term – This means that even after paying your business and personal expenses, you’re still saving tens of thousands of dollars each year, and that’s going toward long-term savings (like retirement). For example, if you’re saving $20,000 a year to buy a home in two years, then you likely wouldn’t benefit from incorporating. You want savings that you don’t plan on touching for at least ten years.

3. You’re in a stable position

Because maintaining a corporation can be complex and expensive, you want to ensure you’re maximizing the benefit each year. Here are some things to consider:

  • Your income is stable and growing – If you have big swings in your business, it may be too early to incorporate. We like to see clients with a stable, high income for at least two years before incorporating.

  • Having kids – If you plan on taking time off or reducing your hours to take care of those little humans, it’s usually best to defer incorporating.

  • Home plans – If you’re planning on making a large purchase like buying a home in the next several years, you’ll want to focus on that first before incorporating.

Other factors

Although most practitioners incorporate for the tax benefits, there can be other factors. In some cases, there can be additional liability protection from being incorporated. That means instead of someone suing you - which could threaten your personal assets like your home and investments - they would sue the corporation, so only the corporation’s assets would be at risk.

This alone usually isn’t a sufficient reason to incorporate. Why? Most provinces have rules that still hold you personally accountable for any professional liability issues, regardless of whether you’re incorporated or not. And many lenders will make you personally guarantee corporate-level debt, so that’s a wash too.

Instead of incorporating just for the liability protection, many practitioners will simply increase their insurance coverage - including commercial general liability, which covers many non-professional liability issues like trips and falls - and continue practising as sole proprietors.