Dear Peak Money,
I've transitioned my side hustle as a content creator into a full-time gig and am on track to earn six figures this year! My accountant suggested I consider incorporating my business, which seems unnecessarily complicated for my one-person operation. Should I stay a sole proprietor for now?
Sincerely,
Independent Influencer
Dear Independent Influencer,
Whether or not you decide to incorporate is based on three factors.
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Risk. The more risky your business is, the more likely you should incorporate. If you have a high chance of someone suing (think a rock climbing gym), it is a good idea to incorporate sooner rather than later.
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Income. Are you using all the money you're earning? If so, it doesn't make sense from a financial position to incorporate since you'll be required to file a corporate tax return each year, usually a couple of thousand dollars. However, if you don't need all the cash available, then a corporation might make sense as you'll have a lower tax rate should you keep the money in the corporation.
- Income Splitting. If you have a partner that also does work or is a shareholder of your corporation, there is potential for income splitting, ultimately leading to lower taxes.
Remember that all the income you receive as a sole proprietor is taxed at your marginal tax rate in the year you receive it, where you have an opportunity to defer if you keep some money in your corporation. This is the most significant benefit for someone who is a low-risk, one-person business.
Janine Rogan is the Founder and CEO of The Wealth Building Academy, an award-winning Chartered Professional Accountant (CPA), TEDx speaker, and the author of The Pink Tax. She also publishes weekly videos on Youtube and shares financial tips and tricks on Instagram.