Thinking about incorporating your business?
As the new year approaches, many Canadian sole proprietors are wondering if it’s finally time to make the jump to incorporation. Whether you’ve had a big year financially, are eyeing bigger clients, or simply want to protect your personal assets, incorporation can open new doors—but it’s not always the right move for everyone.
Let’s talk about:
- The major advantages of incorporating in Canada
- Five clear signs your business is ready for incorporation
- How to take the first steps toward becoming an incorporated business
Let’s start with what incorporation actually means—and why so many business owners consider it a key milestone.
What It Means to Incorporate in Canada
Incorporation is the legal process of turning your business into its own separate entity—distinct from you as the owner. Once incorporated, your business becomes a corporation with its own rights, responsibilities, and obligations under Canadian law.
The key difference between a sole proprietorship and a corporation is in structure and liability. As a sole proprietor, you and your business are legally the same—meaning you’re personally responsible for all business debts and obligations. Incorporating separates your personal finances from your business, which can significantly reduce your personal liability in case something goes wrong.
From a tax perspective, corporations are taxed differently than individuals. While sole proprietors report business income on their personal tax returns, incorporated businesses file separate corporate tax returns—and may be eligible for lower small business tax rates on the first $500,000 of active business income (depending on your province).
Incorporation also brings additional administrative duties. You’ll need to keep proper corporate records, file separate tax returns, and meet annual legal requirements. But for many businesses, these extra responsibilities are a worthwhile trade-off for the legal protections and tax advantages.
The Key Benefits of Incorporating
While incorporation adds some complexity, it also opens the door to advantages that sole proprietors don’t have access to. For many Canadian business owners, these benefits become more valuable as their income, risk, or long-term goals evolve.
1. Limited Liability Protection
Incorporating creates a legal barrier between your business and your personal assets. This means that if your corporation faces legal action or debts, your home, savings, and personal belongings are generally protected—something sole proprietorships don’t offer.
2. Tax Deferral and Income Splitting Opportunities
Corporations are taxed separately from individuals and often at a lower rate on small business income (as low as 9% federally on the first $500,000, plus provincial rates). This allows you to leave money in the company for reinvestment and potentially defer paying personal income tax. Some business owners can also split income with family members through dividends, depending on the circumstances and tax rules.
3. Enhanced Professional Credibility
An incorporated business can appear more established and trustworthy—especially when dealing with corporate clients, government contracts, or funding applications. Some clients even require you to be incorporated before signing contracts.
4. Business Continuity and Easier Succession
Corporations continue to exist beyond the life of the owner. This makes it easier to sell, transfer, or pass down the business in the future—an important factor if you’re thinking long-term.
In the right situation, these benefits can significantly outweigh the additional paperwork and costs.
5 Clear Signs You’re Ready to Incorporate
Not every business needs to incorporate right away. But as your business grows and evolves, certain milestones are strong indicators that it might be time to make the shift. Here are five signs that it could be the time to incorporate:
1. Your Revenue Is Consistently Over $100,000
When your business income crosses into six figures, incorporation often makes more financial sense. You may benefit from the small business tax rate, and if you don’t need to withdraw all your income personally, you can defer some taxes by leaving profits in the company. However, this is not always the case—if your revenue is over $100,000 but your expenses are high and you end the year with little to no profit (or even a loss), the lower corporate tax rate won’t provide a real benefit. In those situations, staying a sole proprietor may be more advantageous until your profit margins stabilize.
2. You’re Reinvesting Profits Rather Than Taking Them All Out
If you’re regularly using profits to grow your business—by purchasing equipment, hiring help, or expanding—incorporating allows you to leave that money inside the corporation and pay a lower tax rate on it until you actually withdraw it as personal income.
3. You Want to Protect Your Personal Assets
Running a business always carries some risk. If you’re signing leases, hiring employees, or operating in a litigious industry, incorporation can help shield your personal finances from potential legal or financial claims.
4. You’re Expanding or Building a Team
If you’re bringing on employees, subcontractors, or business partners, incorporation creates a clearer legal structure and may be required for payroll setup or benefits administration.
5. Bigger Clients Are Asking If You’re Incorporated
Some clients—especially government agencies or large corporations—prefer or even require their vendors to be incorporated. If you’re running into this roadblock, incorporation may unlock new opportunities. If you’re seeing two or more of these signs in your business, it’s worth having a conversation with an accountant or business advisor
Common Misconceptions About Incorporating
Incorporation can be a smart move—but it’s often misunderstood. Before you take the leap, it’s important to separate fact from fiction. Here are a few common myths that can lead business owners to incorporate for the wrong reasons—or avoid it for the wrong ones.
1. “Incorporation is a tax-free strategy.”
While corporations can access lower tax rates on active business income, you still pay personal taxes when you take money out in the form of salary or dividends. The real tax advantage comes from the ability to defer tax by leaving money in the corporation—not avoiding it altogether.
2. “You need to have employees or a big team to incorporate.”
Not true. Many incorporated businesses are run by a single person. Incorporation isn’t about the size of your team—it’s about the structure and future goals of your business.
3. “Once I incorporate, I won’t need to worry about bookkeeping or taxes as much.”
Actually, the opposite is true. Incorporation adds new responsibilities, including separate corporate tax filings, annual returns, and proper minute book maintenance. Inaccurate bookkeeping can create serious issues when you’re incorporated—so it’s even more important to stay organized.
Understanding these misconceptions can help you make a more informed decision—and avoid unpleasant surprises down the road.
How Do You Get Paid as the Owner of a Corporation?
Once you incorporate, you can no longer just “take money out” of the business like you would as a sole proprietor. Instead, you get paid as a shareholder (through dividends), as an employee (through salary), or a mix of both.
Here’s what that means:
1. Salary (Payroll Income)
If you choose to pay yourself a salary, your corporation must:
- Register for a payroll account with the CRA
- Deduct income tax and CPP contributions
- Remit those deductions monthly or quarterly to the CRA
- Issue a T4 slip at year-end
This setup gives you RRSP contribution room and steady personal income but comes with more administrative work and obligations.
2. Dividends
Dividends are a payment of profits to shareholders (you). These don’t require payroll registration or source deductions, but:
- You’ll need to issue T5 slips
- You don’t earn RRSP contribution room
- Dividends are taxed differently and at varying rates depending on your personal income
3. A Combination of Both
Many business owners use a hybrid strategy—salary for predictable income and RRSP benefits, and dividends for flexibility and tax planning.
Be Prepared
If you’re not ready to set up payroll or track the accounting requirements for dividends, this is a key area where professional advice matters. A good accountant can help you decide on the best compensation strategy and make sure your payments are CRA-compliant.
How to Start the Incorporation Process in Canada
Once you’ve decided that incorporation is right for your business, it’s time to take action. While the process isn’t overly complicated, it’s important to get it right from the start—especially when it comes to your legal setup, business registration, and CRA obligations.
1. Choose Between Federal or Provincial Incorporation
You can incorporate your business federally or provincially.
- Federal incorporation gives you the right to operate under your business name across all provinces and territories, which is ideal if you plan to expand nationally.
- Provincial incorporation (e.g. Ontario, BC, Alberta) is typically faster and cheaper if you plan to do business primarily within one province.
Each option comes with different fees and annual requirements, so it’s worth comparing them or getting advice from a legal or tax professional.
2. Register Your Corporation Name
You’ll need to choose a unique business name and get a NUANS name search report (unless you’re registering a numbered company). Make sure your name meets the legal requirements for corporate identifiers (e.g. Inc., Ltd., Corporation).
3. Get a Business Number and CRA Program Accounts
Once incorporated, you’ll register your corporation with the Canada Revenue Agency (CRA) to receive a Business Number (BN). Depending on your business, you may also need to register for:
- GST/HST (if annual revenue is over $30,000)
- Payroll account (if hiring employees)
- Corporate income tax account (mandatory)
4. Open a Separate Corporate Bank Account
Your corporation is a distinct legal entity, so it must have its own bank account. This helps with clean record-keeping and keeps personal and business finances clearly separated.
5. Maintain Corporate Records and Stay Compliant
You’ll be required to maintain certain documents in your corporate minute book, including bylaws, share registers, and meeting minutes. You’ll also need to file annual returns with your provincial or federal registry, and a T2 corporate tax return with the CRA.
If this sounds overwhelming, you’re not alone. Many small business owners choose to work with an accountant or incorporation service to get everything set up properly the first time.
Incorporating your business isn’t just a legal decision—it’s an operational shift that affects how you manage income, expenses, payroll, and taxes. That’s where a good bookkeeper can make all the difference.
Whether it’s setting up your new chart of accounts, helping you separate personal and business finances, or tracking owner payments (salary vs. dividends), a professional bookkeeper ensures your books stay clean, compliant, and ready for tax time. They can also coordinate with your accountant to make sure your incorporation is structured in a way that supports your goals.
Thinking of incorporating? Let us help you make the transition smooth and stress-free—so you can focus on growing your business, not decoding CRA rules.
