Last updated: Feb. 18, 2025 

Unlocking Growth: The Advantages of Incorporation for Canadian Small Businesses 

Small business owners want to minimize their tax burden and maximize their profits. While incorporating can help you pay less tax, is it right for you and your business? 

This article will explore the benefits and implications of incorporation. As always, we recommend consulting a tax specialist before making major business decisions. 

Understanding Business Structures in Canada 

When starting a business, you typically have three structural options: 

• Sole Proprietorship: The simplest structure in which a single individual owns and operates the business. The owner and the business are legally considered a single entity. 

• Partnership: Two or more individuals share ownership and responsibilities. Similar to sole proprietorships, partners are personally liable for business debts. 

• Incorporation: A corporation becomes a legal entity separate from its owners. This offers several potential advantages, but it also increases complexity. 

From Sole Proprietor to Corporation: Exploring the Benefits of Incorporation 

Incorporation is not a one-size-fits-all solution, but there are some key advantages:  

• Limited Liability: Unlike sole proprietorships or partnerships, a corporation is a separate legal entity from you. Generally, your personal assets are protected from business debts and lawsuits (consult a legal professional for specific exceptions). 

• Lower Corporate Tax Rates: Canadian corporations often benefit from lower tax rates on active business income compared to personal income tax rates. The Small Business Deduction (SBD) further reduces the corporate tax rate for eligible businesses. 

• Income Tax Deferral: You can defer personal income tax by retaining profits within the corporation. This allows you to reinvest earnings back into the business or other investments. 

• Lifetime Capital Gains Exemption (LCGE): This is a significant advantage when selling your business as it allows you to exclude a substantial portion of the capital gains from taxation. The LCGE was recently increased to $1.25 million for corporations and farmers. It is a lifetime limit and is adjusted annually. 

Sole Proprietorship vs. Incorporation: A Comparison 

Feature	Sole Proprietorship	Incorporation
Legal Structure	No separate legal entity—the  owner and business are one.	Separate legal entity—the corporation is distinct from owners.
Liability	Owner is personally liable for all business debts and obligations. Personal assets are at risk.	Owner’s personal liability is generally limited to their investment in the corporation. Personal assets are typically protected (consult with a legal professional for exceptions).
Taxation	Business income is taxed as personal income.	Corporation pays corporate income tax on its profits. Owners are taxed on salary or dividends received.
Tax Rates	Personal income tax rates, which can be higher.	Corporate income tax rates, often lower, especially with the Small Business Deduction.
Income Tax Deferral	Not possible.	Possible to defer personal taxes by retaining profits within the corporation.
Lifetime Capital Gains Exemption (LCGE)	Not available.	Available on capital gains from the sale of qualifying small business shares.
Income Splitting	Limited opportunities.	More opportunities for income splitting with family members through dividends.
Administrative Burden	Simpler setup and less paperwork.	More complex setup, ongoing compliance requirements such as minute books, and other paperwork.
Costs	Lower initial costs.	Higher initial set-up costs and ongoing compliance costs.
Access to Capital	May be more difficult to raise capital.	Can be easier to raise capital through issuing shares.
Business Name	Can operate under the owner’s name or a registered business name.	Must register a corporate name.
Continuity	Business ceases to exist if the owner dies or becomes incapacitated.	Business can continue to operate even if ownership changes.

 

Is Incorporation the Next Step for Your Business? 

Incorporating involves costs such as setup fees, ongoing compliance, and complexities like increased paperwork and the potential need for professional assistance. Before deciding, consider these questions: 

• Profitability: Is your business consistently profitable? The tax advantages of incorporation grow exponentially as profits increase. 

• Liability: Does running your business come with significant liability risks? The limited liability protection of incorporation can be crucial in high-risk industries. 

• Long-term Goals: Do you plan to sell your business in the future? The LCGE makes incorporation particularly attractive for long-term business owners. 

• Financial Situation: Tax filing and keeping up with administrative paperwork, like Minute Books, usually require yearly professional support. Can you absorb these ongoing costs and still make a profit?

Free Download: The Ultimate Guide to Incorporated Small Business in Canada

Many incorporated business owners feel intimidated by the demands of tax season and the corporate filing requirements of the Canada Revenue Agency (CRA). This is completely natural.

While there are numerous benefits to incorporation, it also comes with complex obligations. The complexity and administrative burden of these requirements leave many businesses struggling to keep up.

That’s why we’ve created “The Ultimate Guide to Incorporated Small Business in Canada“.  Not only will it help you get organized for tax season, but it will help you make sense of your obligations under a corporate structure and to take advantage of the benefits!

Need help with corporate filing obligations?

For more than 70 years, we have worked with tens of thousands of farm and small business owners across Canada. We optimize their tax returns, maximize their tax savings and support their back office needs with bookkeeping and payroll. Our legal services including minute book filing and annual returns.

To find out more about how we can support your business, take 15 minutes to connect with us so we can get to know each other.