Pros and Cons of Incorporating a Small Business in Canada

Aug 4, 2023 | General Business

Deciding whether to change the business structure of your small business from a sole proprietorship to a corporation is a big decision based on your individual circumstances. To help guide you in making this important decision there are some questions that will help you think about your company and apply the pros and cons of incorporating a small business to your unique situation. Below these thought provoking questions is a case study where you can follow Sarah, a successful entrepreneur, as she applies the pros and cons of incorporating a small business against her company.

Questions to Ask and Consider

What Are Your Business Objectives?

Consider the short and long-term goals for your business.

  • Are you aiming for growth in your current market and industry?
  • Are you looking to move into new markets and industries provincially or nationally?
  • What is my financial situation like? Can I afford the additional costs?
  • Are you looking for investors to help you grow or are you looking for bank financing?

Answering these questions will help give you clarity about the direction of your business and help guide you to answering the question “Should I incorporate now or remain a sole proprietorship? ”

Are You Ready for Additional Documentation?

Think about your readiness and commitment to handle increased paperwork and regulatory obligations. On top of your already busy schedule, visualize adding management of additional forms and reports including:

  • Enhanced Record Keeping – Corporations are mandated to maintain more detailed records of its daily business transactions compared to sole proprietorships.
  • Corporate Tax Return – Corporations must file a more complex annual tax return (T2) for company income. As a shareholder you will continue filing your own personal tax return as well. After incorporating you will have 2 tax returns to file rather than just the one as a sole proprietor.
  • Articles of Incorporation – Articles of Incorporation is a document outlining business particulars such as company name, registered office address, director and shareholder information and share authorization. You file it with the provincial or federal government to show legal creation of the corporation.
  • Shareholder Agreements – Shareholder agreements lay out the rights and obligations of each shareholder and is a legal document. It serves to prevent disputes, clarify ownership, and define decision-making authority.
  • Share Issuance & Certificates – Share certificates are documents outlining the registered owners of the company, the number of shares, class of shares, the date the shares were purchased and the cost of the shares. This document can be used as proof for entitlement for any declared dividends or as legal paperwork in a lawsuit.
  • Annual Reports – Corporations are required to submit annual reports to provincial or territorial authorities. This report is to tell the government that the corporation is still active and reconfirms the shareholders an directors. Please review the process on the BC government website: BC Corporate Online

Are you ready for the additional time and commitment for the added documentation?

Do You Want Personal Asset Protection?

Incorporation can protect your personal assets such as your home, car and/or your investment accounts in a situation where you and your business end up in a lawsuit.

  • What will happen if someone gets hurt on my premises and decides to sue me?
  • Will I have to sell my house or car to pay for damages? How is that going to make me feel?
  • Will I have to cash in all my savings for retirement, my child’s education or house down payment? How is that going to make me feel?
  • What am I going to do if I lose everything I have worked for and have to start from scratch? How will this affect me and my family?
  • To what extent will the potential financial ruin be? Will I be able to recover and start over?

Visualize a scenario where you are sued but your personal assets such as your home, car and savings account are safe. There is very little risk of financial ruin. Your child’s education fund is intact. How do you feel?

Can you live knowing everything you have worked for is at risk or do you need the peace of mind of protection?

Can You Manage the Costs?

Contemplate the costs tied to incorporation, including establishing the corporation, additional bookkeeping, staffing, and tax return filing. It’s important to assess whether these financial outlays are within your budget.

Some additional costs to consider are:

  • Bookkeeping Fees: The increased technical detail of your bookkeeping costs you more money.
  • Accounting Fees: Corporate Tax Returns are more complicated and expensive to complete. You most likely will need an accountant to prepare the return and your annual financial statements. You might also need to strategize for the best tax situation for you and your family. This can involve deciding how much money to take out of the corporation and in what form (wages or dividends)? Do I pay anyone in my family a wage?
  • Legal Fees: Legal fees will increase to set up the corporation. Also, when a business’s complexity changes there is more need to watch your back legally. Having a lawyer write contracts, employee contracts, engagement letters…etc. will become more important.
  • Time: There is more paperwork, recording responsibilities and legislation to follow. There is more research to find the right person to help you with these new tasks. All these additional components to your business will take time away from you working in your business.

Can you manage the additional costs of incorporation?

Is the Timing Right?

Think about your current situation along with the questions outlined above and decide if now is the right time. Consider your business’s performance, the market conditions, growth potential, risk of redundancy as well as your personal circumstances.

  • Is this what I want?
  • At this time in my life?
  • How will it affect time with my family?
  • How will it affect my social life?
  • What will this industry look like in 3 years time? 5 years?

Can you do this now or should you wait another year to incorporate?

Pros of Incorporating in Canada:

Limited Liability

Incorporation provides limited liability to the shareholder(s) of a company and draws that line separating the business assets from the shareholder’s personal assets.

What is limited liability?

  • Is a business legality where the shareholder(s) of a corporation are not personally liable for the company’s debts or other liabilities.
  • In case of a lawsuit, the shareholders will not be personally responsible for a negative financial outcome. This means that the money to pay for damages will come from the corporation’s assets such as the bank account, equipment, investments…etc.
  • If the corporation has sold all of its assets and the compensation has still not been paid in full, the shareholder(s) are not required to sell their personal belongings to pay the rest of the compensation. The corporation is solely responsible for the entire amount.

Example: If you own an incorporated business and someone falls and hurts themselves on company property, they may decide to sue the company for damages. If they do take the company to court and there is a financial judgement against the company, the shareholder’s personal assets are protected. The shareholder is not legally obligated to cash out everything they own in order to pay the court awarded damages.

***Read The Tale of Two Entrepreneurs under the Limited Liability section in the case study for Sarah’s Art Studio presented below. The example highlights the difference between the risk a sole proprietor lives with compared to the protection a corporation works under.

Tax Advantages

  • Corporations have lower tax rates that potentially lead to substantial tax savings.
  • Tax rules favour corporations over sole proprietors with better deductions and benefits: such as the small business deduction.
  • Ability to strategize the timing of a shareholder’s personal income – you can use a corporation as a tax deferral strategy and take money out as either wages or dividends when the timing works best for you.

Imagine running a successful consultancy business and having the choice to leave a portion of the profits (money) in the company rather than take it out for personal use. Imagine taking that money out at a time when your income is in a lower tax bracket. You will pay less personal taxes.

***See the Tax Advantages section in the case study for Sarah’s Art Studio presented below to see how incorporating saved Sarah cash and the opportunities that opened up for her.

Professional Image & Enhanced Funding

  • Operating as a corporation creates a more professional image for your business in the eyes of the public. There is a tendency to view a corporation as a more legitimate, stable business.
  • Being viewed as a more legitimate, stable business helps if you are looking for investors or financing to help you grow.
  • Corporations get increased funding amounts, better interest rates and better terms on loans.

Income Allocation

Corporations offer the flexibility to distribute income among family members in lower tax brackets.

For instance: Both you and your spouse work in the family-owned retail business. Rather than one person taking out a high wage with a higher tax obligation, you can split the amount. This leads to both you and your spouse paying a lower combined tax.

This approach could potentially reduce the overall family tax burden.

***For a good explanation and example of tax brackets and how they work see Tax Advantages section in the case study Sarah’s Art Studio presented below.

Cons of Incorporating in Canada:

Elevated Costs

Incorporation requires upfront and ongoing fees, coupled with the potential for increased compliance expenses tied to paperwork and regulations. Imagine running a small graphic design studio and needing to cover government filing fees, legal charges, and annual report submissions.

Greater Regulations

Corporations deal with more extensive governmental regulations and oversight compared to other business structures. Picture managing a small landscaping enterprise and grappling with additional paperwork, such as meticulous record-keeping and corporate tax return filings.

Tax Complexity

Filing corporate taxes can be complex and will usually require professional assistance. For instance, if you operate a freelance writing business, you may need to navigate complex corporate tax regulations with the aid of an accountant.

Separation of Personal & Business Transactions

Maintaining a clear distinction between business and personal finances is critical to retain limited liability protection. Imagine being a self-employed plumber and managing separate bank accounts to monitor business and personal financial transactions.

Risk of Dual Taxation

Corporate profits and dividends can be subject to double taxation.

For example:

  • A software development business with profits (additional cash from operations) decides to distribute dividends to the shareholders.
  • The company has already paid corporate tax on that additional cash because the cash was part of the corporations net income.
  • When the dividends are given to the shareholder, the shareholder is required to pay personal taxes on the amount received.

Your Path to an Informed Decision

Read the case study presented below and as you assess the pros and cons of incorporating a small business against your current situation, keep Sarah’s story in mind. Reflect upon these straightforward questions, evaluate the pros and cons as they relate to your specific situation. Find some experts – lawyers, accountants, and mentors – to help reach a decision that aligns with your objectives.

CASE STUDY: Incorporating Sarah’s Art Studio

For a deeper understanding of how to assess the pros and cons of incorporating a small business, let’s follow a case study involving Sarah’s Art Studio – a thriving sole proprietorship contemplating the change to incorporation.


  • Sarah, is a passionate artist, who possesses an exceptional talent for crafting original paintings.
  • Her studio has turned into a cherished hub for art enthusiasts looking for original masterpieces.
  • With increasing popularity and demand, Sarah has built an impressive client list.

Sarah wants to assess the pros and cons of incorporating a small business against her current situation to decide if now is the time to transition from sole proprietorship to a corporation.

Sarah’s Current Circumstances

  • As the proud sole proprietor of “Sarah’s Art Studio,” Sarah controls all the core business operations.
  • She is successfully managing her company as sole proprietor.
  • Her annual business revenue has steadily increased to $250,000.
  • She has part-time employees to assist with administrative tasks and framing artwork.
  • Sarah co-mingles business and personal purchases, relying on her personal bank account for all financial transactions.
  • Sarah has concerns about inadequate legal safeguarding for her personal assets. She is troubled by the potential uncertainty of legal actions or unforeseen liabilities stemming from her business activities.

Exploring Incorporation Considerations

Limited Liability Protection

To grasp the concept of limited liability protection when weighing the pros and cons of incorporating a small business, consider A Tale of Two Entrepreneurs: Sarah and Jake. Sarah, the creative artist, operates as a sole proprietor, while Jake runs his bakery as an incorporated business.

A Tale of Two Entrepreneurs: Sarah and Jake
Hypothetical Scenario:
  • A situation arises at Sarah’s Art Studio when a customer accidentally gets injured.
  • The injured visitor initiates legal proceedings, seeking compensation for medical expenses and damages.
Exploring Possible Outcomes

Sarah’s Risk: Operating as a sole proprietor, Sarah’s personal assets intertwine with her business. There is a possibility that the lawsuit rules unfavorably toward Sarah and the awarded compensation could be greater than the value of her business assets. Sarah could be forced to sell her personal belongings in order to meet the court-ordered financial settlement.

In contrast, let’s consider Jake’s incorporated bakery:

Jake’s Protection: Functioning as a corporation, Jake’s personal assets remain distinctly separate from his bakery’s assets. In case of legal action, compensation would be drawn from the bakery’s assets – like the corporate bank accounts, investments and the sale of equipment. Jake’s personal assets, including his home, savings and investments would be protected against a forcible selling of personal assets to come up with the awarded amount. This line between personal and business assets protects Jake with limited liability protection.

The Difference Between the Two Scenarios

These two scenarios illustrate the main difference in how personal assets are treated during legal proceedings for businesses. Basically, how personal assets are treated is dependent on the business structure: a sole proprietorship or corporation. Sarah, as a sole proprietor, faces the vulnerability and risk of personal asset exposure. Jake on the other hand has legal separation of business and personal assets which provides him protection against similar liabilities.

This difference in liability protection is one of the main advantages sole proprietors use to determine whether or not to incorporate. However, there are more areas to assess when considering the pros and cons of incorporating a small business. The next section will show the difference in tax situations between a sole proprietor and a corporation, as well as show the potential tax benefits that Sarah could potentially take advantage of as a corporation.

Tax Advantages

Sarah’s growing revenue is exciting but creates anxiety regarding the increased tax implications. As a sole proprietor, Sarah’s business income is recorded on her personal tax return making her entire business income taxed at personal tax rates.

Personal tax rates are categorized in taxable income thresholds. The higher the income, the higher the tax bracket and the associated tax rate. Sarah’s income already puts her in the highest tax bracket, and her projected substantial growth over the coming years prioritizes the need for strategic tax planning.

Illustrative Example
Personal Tax Calculation

For demonstrative purposes, consider a set of hypothetical federal tax brackets and corresponding rates:

  • Bracket 1: Income up to $30,000 taxed at 15%
  • Bracket 2: Income between $30,001 to $60,000 taxed at 20.5%
  • Bracket 3: Income between $60,001 to $150,000 taxed at 26%
  • Bracket 4: Income above $150,000 taxed at 29%

How does Sarah’s sole proprietor taxable income of $250,000 fall into the tax brackets? What are the associated tax amounts in each tax bracket? How much is Sarah’s total tax? 

Putting Sarah’s income into the appropriate brackets and multiplying by the corresponding tax rates calculates her total tax as:

  • Bracket 1: $30,000 x 15% = $4,500
  • Bracket 2: ($60,000 – $30,001) x 20.5% = $6,149.80
  • Bracket 3: ($150,000-$60,001) x 26% = $23,400
  • Bracket 4: ($250,000 – $150,000) x 29% = $29,000.29

Sarah’s sole proprietorship total tax calculation is: $4,500 + $6,149.80 + $23,400 + $29,000.29 = $63,050.09

Corporate Tax Calculation

How does the personal tax calculated compare if Sarah’s taxable income of $250,000 was in a corporation? 

The appeal of incorporation lies in lower tax rates, numerous deductions, and benefits available to corporations but not sole proprietors.

One such favourable deduction is the Small Business Deduction  – a perk available to Canadian Controlled Private Corporations, granting a reduced tax rate on a portion of their business income up to a certain amount. This threshold amount is $500,000 for federal taxes and varies across provincial and territorial jurisdictions. This significant advantage can be a huge advantage for small businesses.

Taking advantage of the small business deduction rate of 9%, Sarah’s total tax calculation on that same $250,000 of taxable income is: $250,000 X 9% = $22,500.

Comparing the pros and cons of incorporating a small business against the tax burden of her sole proprietorship, Sarah sees a substantial benefit in tax relief. By incorporating, Sarah has a couple options with the potential tax savings.

  • She can keep cash in the company and use it to help grow her company.
  • She can use a personal tax deferral strategy and delay when she takes the money out of the company. This will put her in control and allow her to decide when she has to pay the personal taxes and on what type of income.

With a better understanding of the potential tax perks associated with incorporation, let’s now explore how incorporating can help create opportunities for Sarah’s Art Studio to achieve further business growth.

Business Growth

Sarah hopes to extend her artistic influence, recruit accomplished artists, and potentially rent or buy a small gallery space to showcase her masterpieces to a broader audience. Incorporation introduces more opportunities to help her achieve her goal:

  • Attracting Investors – Incorporation increases the credibility and seriousness attributed to Sarah’s Art Studio in the eyes of prospective investors. Investors favour the organizational structure and commitment of corporations over sole proprietorships.
  • Enhanced Financing – Financial institutions perceive corporations as more stable and dependable, translating into potentially larger loan amounts, preferential interest rates, and favorable loan terms.
  • Access to Grants & Bursaries – Government grants and bursaries designed to help small business expansion become more accessible through incorporation.

As Sarah continues to weigh the pros and cons of incorporating a small business, she sees how incorporating will increase opportunities for her that are not available to her as a sole proprietorship.


An Informed Decision

Having researched the pros and cons of incorporating a small business, reviewed her current circumstances, financial situation, and business expansion goals against those pros and cons, Sarah understands the additional work, costs and commitment becoming incorporated will take. However, the potential long-term gains for her business’s expansion, the protection of her personal assets and the enhanced tax benefits outweigh the cons of incorporating. She believes that incorporating her small business at this time is the right course of action.

The Incorporation Process

Sarah has made the decision to incorporate and now needs to follow a series of steps to legally incorporate her business. Let’s continue to follow Sarah through these steps.

Selecting a Name
  • Sarah elects to name her corporation “Sarah’s Art Studio Inc.” and submits the name for approval to the Provincial Corporate Registry.
  • The name undergoes scrutiny to ensure availability and alignment with the stipulated incorporation prerequisites.
  • Names are rejected because: they resemble existing names, they mislead or confuse the public, they have prohibited terms, they have trademark conflicts, they include inappropriate language.
  • The name must have corporate designators – i.e.: Inc. or Corporation at the end of the name.
  • Once approved, Sarah progresses to the next step of the process.
Articles of Incorporation
  • Sarah completes the Articles of Incorporation form on the Provincial Registry Services Website, providing particulars such as company name, registered office address, and authorized share count.
Determining Share Structure
  • A corporation’s share structure shows the number of shares that can be issued, the categories, and the respective values.
  • The share structure governs ownership rights, control, and profit distribution among shareholders.
  • The share structure can be modified through future shareholders’ meetings and resolutions.
  • Sarah chooses to issue 100 shares at $10 each to herself as the primary shareholder. This provides flexibility for future ownership adjustments.
  • Sarah formulates corporate bylaws outlining the corporation’s governance, including protocols for shareholder assemblies and director responsibilities.
Submission and Fees
  • Sarah submits the necessary documentation to the government and pays the incorporation fee.
Shareholder Agreement
  • As the sole shareholder, Sarah drafts a shareholder agreement outlining her rights and responsibilities as the proprietor.


The decision to transition your small business from a sole proprietorship to a corporation is a logical and important step that demands careful consideration. The journey of Sarah’s Art Studio provides valuable insights into the process of assessing the pros and cons of incorporating a small business. Reflect on Sarah’s story and explore the various aspects to better equip yourself to make the right decision that works for you.

You hold the power to align your business objectives, financial goals, and personal circumstances. Although, incorporating includes additional paperwork, regulations, and costs, it also offers the potential for increased protection, tax benefits, and opportunities for growth. Your unique situation should guide your choice.

With the case study of Sarah’s Art Studio in mind, take a moment to ask yourself the relevant questions: What are your business goals? Do you want the added responsibilities? Do you prioritize personal safeguarding and financial benefits? Is the timing right for you? Through these considerations and consultation with experts, you can confidently shape a decision that points your business towards success.

For more information on incorporating a small business in British Columbia, go the the government of BC’s website: BC Government Website for Incorporating a Business.





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