A local accountant is addressing the question that every business owner must at some point consider: Is it time to incorporate?

While the motivations and potential benefits (and drawbacks) to incorporating are going to vary for each business owner, chartered professional accountant Nicole Cahoon says the answer generally comes down to one major factor.

鈥淚f you鈥檙e earning more income from your business than you need to draw from it, it鈥檚 generally a good time to have that discussion with your accountant,鈥� says Cahoon. 鈥淥ne of the main reasons to incorporate is the lower corporate tax rate compared to personal marginal rates, which is what you pay as a sole proprietor or partnership. If your business can retain earned income within the corporation, you can defer tax to future years on that income to the extent that it鈥檚 not distributed to you as a salary or dividend.鈥�

Further reducing those taxes on corporations, she says, is the federal small business tax deduction, which applies to the first $500,000 of 鈥渁ctive business income鈥� earned by a Canadian-controlled private corporation. Cahoon notes, however, that there are some exclusions to the deduction, such as property income and income earned through a personal service business.

鈥淚t鈥檚 really important that if you鈥檙e thinking about incorporating you talk to your accountant to make sure you fully understand the tax implications and how they apply in your case.鈥�

Another factor that may affect the decision to incorporate or not is the legal protection a corporation can provide. Here too, however, Cahoon warns that the protective shelter of a corporation may not extend as far as many people think.

鈥淎 corporation won鈥檛 protect you from all forms of liability,鈥� she says. 鈥淕enerally speaking, your liability is limited to the amount you invest in the company for your shares. In some situations, that protection disappears altogether, like if you guarantee a loan for the corporation or there鈥檚 GST or payroll tax owing to Canada Revenue Agency.鈥�

Even once the decision to incorporate is made, it鈥檚 not necessarily a simple affair, as rules regarding the transfer of capital assets and the sale of shares could have serious tax implications and should be carefully considered.

鈥淎t the end of the day, incorporating your business is a complicated process,鈥� says Cahoon. 鈥淚鈥檇 caution anyone considering incorporating to seek professional advice to ensure the resulting corporation is structured appropriately. With appropriate planning alongside your accountant, incorporating can be extremely advantageous."