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When to Incorporate your Sole Proprietorship

In our Ask a Pro series, we have asked our accountants to share some of the most frequently asked questions they receive throughout the year. While every situation can be different, it is a good starting point to determine where you specifically need help.

This month we are looking at when to incorporate your sole proprietorship. There are a couple of key factors that can help you decide whether this is a good move for your business or whether you should keep your business structure as-is. Considering that a corporation requires more structure, documents need to be completed annually, and you will want to make sure your revenue is at a point where you can afford the legal and professional fees. You will also want to ensure you’re in a position to take advantage of the 12% tax bracket for the funds left in the corporation.

Is it the right time to incorporate my Sole Proprietorship?

You may have heard about the tax benefits of incorporating, but is it right for you? If you are finding that your sole proprietorship is earning more income than expected, it may be the correct decision to incorporate and start leaving some savings inside the corporation. Any income that is left in the corporation is taxed at a flat rate of 12% which is likely lower than your marginal tax rate in this situation.

Another reason to incorporate would be if you were operating your sole proprietorship as a side business ad you are currently earning employment income from other sources. This would keep your business income separate from your employment income and would give you more control to optimize your personal tax rate year over year.

Your Local Business Tax Experts

If these situations do not apply to you it may not be the right time to take your business in this direction. Talk to your accountant or contact us to see if incorporating is right for you.

–          Mike Devine, Managing Partner