Should I Incorporate My Business in Canada?

As your business grows, you may start asking yourself an important question:

Should I incorporate?

Whether you are an actor, musician, filmmaker, content creator, athlete, or other professional freelancer, incorporating your business can offer potential benefits. However, incorporation is not automatically the right choice for everyone.

The best business structure depends on your income, expenses, personal financial needs, and future plans.

What Does It Mean to Incorporate?

Many entertainment professionals begin as sole proprietors. A sole proprietorship is a relatively simple business structure where the business income is generally reported on your personal tax return.

A corporation, on the other hand, is a separate legal entity. The corporation earns income, pays its own taxes, and you generally take money from the corporation through methods such as salary or dividends.

Incorporation can provide additional tax-planning opportunities, but it also comes with additional costs and administrative responsibilities.

When Might Incorporation Make Sense?

One of the most important factors is whether your business generates more profit than you need to take home personally.

For example, imagine a freelance filmmaker earns $150,000 in revenue. After business expenses, the business has $90,000 in profit. If the filmmaker needs to withdraw the entire $90,000 to pay personal living expenses, incorporation may not provide as much benefit as someone who can leave some of the money in the corporation.

If, however, the filmmaker only needs $60,000 personally and can leave the remaining funds in the business to cover future expenses, invest in equipment, or support business growth, incorporation may be worth considering.

This is why the question is not simply: “How much money do I make?” A better question is: “How much money does my business need to pay me personally?”

Potential Benefits of Incorporating:

• Income Tax Planning - A corporation may allow you to plan when business income is paid to you personally. This can potentially provide more flexibility in managing your personal and business income.

• Reinvesting in Your Business - If you can leave some money in the corporation, those funds may be available for future business expenses, equipment, marketing, or growth.

• Business Growth - A corporation may be useful for entertainment professionals who are expanding their business, hiring others, working on larger projects, or developing multiple revenue streams.

• Professional Planning - As your business becomes more complex, a corporate structure may provide additional opportunities for tax and financial planning.

However, the potential benefits need to be considered alongside the costs.

What Are the Downsides?

Incorporation is not free or completely hands-off. A corporation typically involves:

• Additional accounting and professional fees

• Annual corporate tax filings

• Corporate records and administrative requirements

• More complex bookkeeping

• Additional planning when taking money out of the corporation

  
  

It is also important to remember that corporate money is not automatically your personal money. Once your business is incorporated, there is a distinction between you and the corporation. This means that simply incorporating does not automatically result in tax savings.

When Might Staying a Sole Proprietor Make Sense?

• Business income is still relatively inconsistent

• Most or all of the business income is needed for personal expenses

• The business is still in its early stages

• The additional costs of incorporation would outweigh the potential benefits

• The business structure is relatively simple

  
  

There is nothing wrong with operating as a sole proprietor. The best structure is the one that makes sense for your specific circumstances.

The Bottom Line

Incorporation can be a useful tool for some entertainment professionals—but it is not a universal solution. Before incorporating, consider:

1. How profitable is the business?

2. How consistent is the income?

3. How much money do you need personally?

4. Can you leave money in the business?

5. Are you planning to grow?

6. Are the additional accounting and administrative costs worthwhile?

   
   

The right answer may change as your business changes.

If you are considering incorporating your business, it is worth getting professional advice before making the decision. At Art of Tax, we help entertainment professionals understand their options and make informed decisions about their business structure and tax planning.

Not sure whether incorporation is right for you? Contact Art of Tax to discuss your situation.

The content provided is solely for informational purposes and should not be relied upon as a substitute for specialized tax, legal or financial advice.