This is also a complicated decision, and is quite fact-specific. Among other considerations, one of the benefits of paying yourself a salary is that this will help you accumulate room in your RRSP, but paying dividends helps you to avoid income tax withholding on payments. If you want to pay yourself by dividends, but still wish to receive a steady low of funds from your company, you can borrow money from the company and declare dividends periodically to credit your shareholder loan account.
One of the most important considerations in choosing whether or not to incorporated is one’s exposure to creditors, and particularly “involuntary creditors”, or creditors who do not choose to be in a debtor-creditor relationship with you. Voluntary creditors, such as banks and lenders, will often require security from a director before providing credit, and so the corporation’s limited-liability function is less valuable. However, businesses that have a high risk of injuring others or getting into contract disputes should strongly consider incorporation.
For example, independent contractors operating from home and providing services to a single client will receive relatively little from liability projections offered by incorporating, while businesses that invite the public to their premises should strongly consider incorporating to limit their exposure to lawsuits.
In addition to the fees and expenses required to incorporate a business, operating a business through a company involves additional maintenance of corporate records, which typically means paying fees to lawyers. Corporations’ T2 income tax returns are also more complicated, which increases the fees for professional expenses.
However, there are also some hidden costs under tax rules. For example, some “taxpayer relief” provisions are not available to corporations, particularly rules that allow them to amend their income tax returns beyond the normal reassessment period.
