Choosing your legal structure is one of the most consequential decisions when starting a Canadian business.
Sole Proprietorship
Pros: Simple setup, business losses offset personal income, minimal administration.
Cons: Unlimited personal liability, income taxed at personal rates (up to 53.31% in Quebec), no income deferral.
Corporation
Pros: Limited liability, Small Business Deduction (~12.2% on first $500K active income), tax deferral on retained earnings, Lifetime Capital Gains Exemption ($1.25M on qualifying shares).
Cons: Higher setup costs, more administration, business losses can't offset personal income.
💡 Rule of Thumb: Incorporation typically makes financial sense when business net income consistently exceeds $60,000–$80,000/year. Below that, administrative costs often outweigh tax benefits. Always consider liability protection regardless of income level.
When to Incorporate
- Business income consistently exceeds personal living needs
- Concerned about personal liability in your industry
- Planning to sell the business (capital gains exemption)
- Want to bring in investors or co-owners