The decision whether or not to incorporate should be based on a number of factors, including the type of business, its size (as measured by revenues, assets, profitability), the number and type of customers. Certain types of business may be more inclined to incur liability for the owners than others.

Limited liability is perhaps the most frequently cited advantage of incorporation, however this advantage should be balanced with all of the related responsibilities and disadvantages. There are too many relevant aspects to review in detail in this response, however these comment may provide impetus for thought.

When a business is sued, it will need to have the resources to defend itself, whether it is incorporated or unincorporated. In addition, the directors of a corporation should keep in mind that they may still be personally liable in the event of non-payment of employee source deductions, WSIB premiums and HST. The Canada Revenue Agency (CRA) may issue a director's assessment to a director who chooses, for example, to use amounts earmarked on account of employee source deductions or goods and services tax ("GST") in a failed attempt to continue to run a business.

There are many examples of businesses that were encouraged to incorporate simply because the person doing the incorporation stood to earn a significant fee from the incorporation, however the director(s) and shareholder(s) basically had little idea what they were getting into. The individuals who are going to be standing behind the company should first inform themselves by studying the relevant legislation (in Canada this will generally either be the Canada Business Corporation Act, or one of provincial business corporations statutes). For the uninitiated, the company has to keep "books and records", which implies A) a minute book which should be keep up to date with pertinent resolutions and B) a reasonable chart of accounts, where financial transactions are recorded and kept up to date. The company has to present a proper set of financial statements to its shareholders for approval at the annual meeting and has to file a corporate tax return, within the prescribed time frames. A small corporation that does not keep a proper set of up-to-date accounting records will frequently be presenting its accountant with a "shoe box job" at year end. This may involve an entirely separate reconstructive bookkeeping engagement that will be time consuming and costly for the company, before financial statements can be finalized.

The tax advantages to incorporation include corporate tax rates that are lower than the higher marginal personal rates, the small business deduction, the flexibility in taking compensation in form of dividends versus salary. Corporations also have advantages in being able to obtain financing from 3rd parties by way of share issues. These foregoing advantages must be considered in relation to responsibility involved in maintaining a corporation.

Unless the principals are truly prepared for what they are getting into, it frequently make little sense to incorporate and they may be better advised to continue as sole proprietors or in a partnership. Incorporation should only be done after the principals have truly informed themselves.

In order to be properly informed about incorporation, it would be a good idea to meet with a qualified advisor, such as an experienced Chartered Professional Accountant, for a detailed consultation.