When considering the next steps for your growing business, incorporation is often a topic that comes up. While many business owners are aware of the limited liability protection that incorporation offers, the potential tax advantages can be just as significant, especially as your business becomes more profitable.

When do Tax Advantages Matter?

Some people choose to incorporate right away for reasons like liability protection, even if the tax advantages aren’t substantial at the outset. However, as your business grows and starts generating more income than you need for personal expenses, the tax benefits of incorporation become more relevant.

For example, if you’ve been operating as a sole proprietorship or partnership and your business is now making more money than you’re spending, it may be time to consider incorporation. This is often the point where the tax advantages start to make a real difference.

How Does Incorporation Provide Tax Advantages?

One of the main tax benefits of incorporating is the ability to leave money in the company, rather than taking it all out as personal income. When you roll your existing business into a corporation, any profits that remain in the company are typically taxed at a lower corporate rate, rather than your personal highest tax rate. This means that as long as you don’t withdraw the money for personal use, you can defer paying the higher personal tax.

It’s important to note that you will eventually have to pay personal tax when you take the money out of the company. However, until that time, you have more after-tax money working for you inside the corporation.

The ability to defer personal tax means you can keep more capital in your business. This extra after-tax money can be reinvested to help your business grow, or it can be saved for your retirement. Essentially, incorporation gives you more flexibility and control over how and when you pay tax on your business earnings.

Conclusion

While the tax advantages of incorporation can be significant, they depend on your specific circumstances. It’s always a good idea to speak with your accountant to determine whether incorporation makes sense for you from a tax perspective. By understanding how and when these advantages apply, you can make informed decisions that support your business’s long-term success.

Written by Heather Dixon and Wyatt Shipley

Updated August 11, 2025. Originally posted November 15, 2018.