{"id":537392,"date":"2026-03-13T08:30:34","date_gmt":"2026-03-13T08:30:34","guid":{"rendered":"https:\/\/www.newsbeep.com\/au\/537392\/"},"modified":"2026-03-13T08:30:34","modified_gmt":"2026-03-13T08:30:34","slug":"does-it-make-sense-for-small-business-owners-to-incorporate","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/au\/537392\/","title":{"rendered":"Does it make sense for small-business owners to incorporate?"},"content":{"rendered":"

Open this photo in gallery:<\/a><\/p>\n

A business owner\u2019s timeline is an important factor in deciding whether to incorporate.GETTY IMAGES<\/p>\n

To incorporate, or not to incorporate? <\/p>\n

For many Canadian sole proprietors, that is the question, and advisors say the answer depends on several factors, including income levels and whether they plan to invest in and eventually sell their businesses.<\/p>\n

\u201cWe see becoming incorporated as a tool, and its value depends on when you use it,\u201d says Nancy Grouni, financial planner at Objective Financial Partners in Markham, Ont. \u201cThe right structure can amplify wealth, but it could also just add paperwork.\u201d<\/p>\n

The general rule of thumb on incorporation is whether a business owner is making more money every year than they need to live comfortably, and would therefore be able to sock away sizeable savings in the corporation, says Aravind Sithamparapillai, a financial planner with Ironwood Wealth Management in Fonthill, Ont.<\/p>\n

Incorporated business owners receive significant tax deferral benefits. They pay a much lower tax rate on the first $500,000 of profits inside their corporations than sole proprietors pay on profits they receive personally. <\/p>\n

For example, in Ontario, an incorporated business owner earning $500,000 in their corporation would be taxed 12.2 per cent, or a total of $61,000, while a sole proprietor earning the same amount would owe $229,128 in taxes and Canada Pension Plan contributions.<\/p>\n

The money incorporated business owners pay themselves, either as salary or dividend income, is taxed personally, and the remaining money saved in the corporation can be reinvested in the business or invested in the market.<\/p>\n

\u201cFinancially, if you are incorporating, you\u2019re doing one [or] two things: you\u2019re growing and running a real business, [and] you\u2019re saving a decent chunk of money. If I\u2019m bringing in $200,000, I can pay myself $100,000 and save the rest to expand, buy a new vehicle, acquire a competitor, etcetera,\u201d Mr. Sithamparapillai says.<\/p>\n

\u2018Less about formality and more about fit\u2019<\/p>\n

Ms. Grouni says incorporation can be a powerful retirement and estate planning vehicle, but \u201cthere does have to be a sound strategy behind them. It\u2019s less about formality and more about fit.\u201d It also makes sense if a business owner plans to sell the company one day and qualify for the capital gains lifetime exemption for a small-business sale, of $1.25-million.<\/p>\n

Corporations also protect business owners from creditors or lawsuits coming after their personal assets, Mr. Sithamparapillai says. <\/p>\n

He points out that certain professions, such as health-care practitioners, can still be held personally liable for their professional actions even if they\u2019re incorporated.<\/p>\n

Incorporated business owners take on a much higher administrative burden than sole proprietors, including a T2 corporate income tax return as well as bookkeeping, legal and compliance expenses. <\/p>\n

\u201cThey only pay off if the tax deferral does,\u201d Ms. Grouni says.<\/p>\n

Until they were scrapped in 2025, the federal government\u2019s proposed changes to the capital gains inclusion rate would have hit incorporated business owners harder than sole proprietors. <\/p>\n

The changes would have increased the capital gains inclusion rate on any gain over the $250,000 personal exemption, but that would not have applied to assets held in a corporation, breaking the tax principle of integration, says Jason Pereira, partner and senior financial planner at Woodgate Financial in Toronto.<\/p>\n

But he noted that if the changes had gone through, they likely would not have altered the calculus for business owners who wanted to incorporate to grow their companies or who had plans to eventually sell.<\/p>\n

Business timeline is a key consideration<\/p>\n

Mr. Pereira says a business owner\u2019s timeline is an important factor in deciding whether to incorporate. Someone who plans to be in business for multiple decades and meets the income test will likely benefit, he says. In certain cases, sole proprietors who are nearing retirement may still benefit from incorporating for a short period.<\/p>\n

\u201cLet\u2019s say you could live off $60,000 a year – you bill for like $500,000 and are planning to retire next year. It still makes sense because they could basically make half-a-million dollars, $440,000 is stored in the corporation, and \u2026 [they can] stretch out the rate at which they receive that money over time,\u201d he says.<\/p>\n

However, he adds, many business owners look to incorporate too early and assume more administrative complexity than they need to. \u201cThey start their business and the first thing they do is incorporate.\u201d<\/p>\n

Those business owners lose out on the option for cash damming, the one tax strategy available to sole proprietors, Mr. Pereira notes. The strategy allows unincorporated business owners to use their business income to pay down personal, non-tax-deductible debt, such as a mortgage, and re-borrow to invest in their business, making the interest payments on that loan deductible at tax time.<\/p>\n

The salary or dividend debate when incorporated<\/p>\n

There\u2019s an active debate among business owners and advisors about whether salary or dividend income makes the most sense for incorporated individuals, Ms. Grouni says. <\/p>\n

On a tax-efficiency basis, it can vary province to province. For example, she says, it\u2019s more tax-efficient for business owners in Ontario to take their income as salary rather than through dividend payments. But she notes that not everyone agrees, because business owners who pay themselves a salary must make both employer and employee CPP contributions, such as a sole proprietor would. <\/p>\n

\u201cIt\u2019s not a tax, it\u2019s a contribution toward a pension,\u201d she explains. \u201cWe look at that as an asset.\u201d<\/p>\n

And, she points out, taking a salary also generates registered retirement savings plan room, while dividend payments do not.<\/p>\n","protected":false},"excerpt":{"rendered":"Open this photo in gallery: A business owner\u2019s timeline is an important factor in deciding whether to incorporate.GETTY…\n","protected":false},"author":2,"featured_media":537393,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[15],"tags":[5416,64,63,99,198,21363,266522],"class_list":["post-537392","post","type-post","status-publish","format-standard","has-post-thumbnail","category-entrepreneurship","tag-adveditorial","tag-au","tag-australia","tag-business","tag-entrepreneurship","tag-noastack","tag-ordid3929245387te"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/537392","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/comments?post=537392"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/posts\/537392\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media\/537393"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/media?parent=537392"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/categories?post=537392"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/au\/wp-json\/wp\/v2\/tags?post=537392"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}