Incorporation is the process of creating an 'artificial person' in order to empower it to run a business. As a separate legal entity, corporations can shield its directors from legal liability (the Limited Liability Company (LLC) behind some company names), and can survive the death of one or all of its directors and signing officers. Governments also give a great deal of tax incentives and benefits to incorporated businesses... Canada is particularly giving to small businesses.
Probably the single largest benefit of incorporation is the tax situation. Federal tax on the first $200k is 12%, combined with whatever your provincial tax rate is (here in nova scotia, I pay an effective 18.1% up to 250k). As you would likely also be a signing officer and shareholder, you can issue yourself dividends. In Canada, the first $25k in dividends is tax free. If your spouse or other family members are substantially involved in the business they may be eligible to be shareholders as well, giving them access to the same dividend issuing structure. Family business is obviously a good thing to have under these cirucmstances.
Additionally, if you apply for a GST number (or equivalent in areas with blended sale/gst taxes, like here in NS) you can claim a GST refund on business related purchases. Many business related purchases are also directly deductable against business income (ie. you pay no tax on the money you used to buy that new widget for the company). Other purchases (such as computers) allow you to reclaim 100% of the tax paid across a period of years.
Needless to say, business travel can be expensed. That might give you an idea why business tends to get done in very warm, fun, sunny places, usually pool or beachside.
... and certainly not the least concern, if your company performs a service (ie. you do work as a representative of YourCo, LLC) that results in a lawsuit, you're often personally shielded from the resulting litigation. I'm fortunate to not have had to experience this yet, but I'm told by some who have that they would have been ruined by a personal suit in the same situation.
It's generally pretty easy to get a company started. Find a lawyer who specializes in corporate law and get him to set you up. He'll create your minute book and get things underway for you to get your seal, business license, and so forth. Good lawyers will also automatically take care of license renewal and maintaining your minute book to reflect directors resolutions (like issuing dividends to yourself). An average incorporation will run you between $1k-$3k depending on the complexity of the business and the scruples of your legal counsel.
You'll also want to get an accountant to make sure your taxes are done up right. Corporations have more scrutiny by CCRA due to the power they wield... don't mess aroun with Lenny from down the block trying to get your year-end to match up with a slide-rule and a #2HB pencil. Your lawyer will almost certainly have good corporate tax specialists that they prefer to work with... easy communication between your professional representatives makes for easier hoop-jumping and, ultimately, less cost.
If you're making that kind of money, you definately owe it to yourself to check it out. Don't linger and hem and haw... it's the difference between an effective 23% tax on earnings (what I did last year) and close to 50% due to so much income in the highest personal brackets.
