How to Know When it’s Time to Incorporate Your Business

know when its time to incorporate your businessA young attractive couple are having dinner. The woman looks up at her boyfriend, "There’s something I need to tell you...I love you!"

He stays silent. He continues to stay silent, for what seems like an eternity. As any of us might do in such an awkward situation, the girlfriend eventually runs off, embarrassed and furious. And that’s when he finally says, "I love you too!"

Timing is everything. You may have recognized this scenario from a commercial a few years ago stressing the importance of timing.

Like the poor boyfriend in the commercial, many doctors and business owners often get the timing wrong in terms of when they incorporate their business or practice. Just because incorporation can dramatically help many people improve their situation, doesn’t mean it’s necessarily the right time for you. Deciding when to incorporate your business can be tricky.

Below is a rough guideline of factors that should be present before you incorporate. If they are there, it’s likely time to look more carefully into the process:

  • Your company has around $100,000 in gross earnings and you anticipate it will continue to grow
  • You feel you are paying too much in personal taxes
  • You would like to income split with your spouse
  • You anticipate being able to save at least $40,000 a year and are looking for a tax preferred way to do it other than RRSPs
  • The above factors are present and you would like an alternative way to fund your children’s post-secondary education
  • The above factors are present and you would like an alternative way to fund your retirement

Although incorporating can be a huge advantage for many doctors and business owners, there are a few drawbacks:

  • Setting up a professional corporation will incur legal fees. It can cost between $750 and $3,500, depending on the complexity of the situation.
  • You will be required to fill out a T2 for corporate returns.
  • You will also need to file an annual corporate financial statement, which can cost between $1,500 and $2,500.

The above points are some rules of thumb you should consider before going ahead with incorporation. They should be treated as a framework as opposed to gospel. I also provide my clients with a cheat sheet to decide if they’re ready for incorporation.

If you would like to learn more about getting incorporated, I recommend you talk with your accountant or feel free to contact me if you’d like more information on this or to get a wealth management opinion on your specific situation.

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