Should You Incorporate? Pros & Cons for Small Business Owners in Canada

What Does It Mean to Incorporate in Canada?

Incorporation means creating a separate legal entity for your business—a corporation—distinct from you as an individual. In Canada, you can incorporate either federally or provincially, depending on your business needs.

Many small business owners wonder whether incorporation is worth the cost and complexity. The answer depends on your income level, risk exposure, and long-term goals.

Pros of Incorporating Your Business

1. Limited Liability Protection

One of the biggest advantages of incorporation is limited liability. In most cases, your personal assets are protected from business debts, lawsuits, or financial losses.

2. Lower Corporate Tax Rates

Canadian-controlled private corporations (CCPCs) benefit from the small business tax rate, which is significantly lower than personal tax rates on business income.

This allows you to:

• Defer personal taxes

• Leave income in the corporation for reinvestment

3. Income Splitting Opportunities

Incorporation may allow income splitting through:

• Salaries paid to family members (when reasonable)

• Dividends to eligible shareholders

This can reduce overall household tax liability when done correctly.

4. Enhanced Business Credibility

A corporation can appear more established to:

• Clients

• Lenders

• Investors

Incorporation may improve access to financing and contracts.

5. Business Continuity

A corporation continues to exist even if ownership changes, making it easier to:

• Sell the business

• Bring in partners

• Plan for succession

Cons of Incorporating Your Business

1. Higher Setup and Ongoing Costs

Incorporation involves:

• Legal and filing fees

• Annual corporate tax returns (T2)

• Separate bookkeeping and payroll

These costs may outweigh benefits for low-income businesses.

2. Increased Administrative Complexity

Corporations require:

• Corporate records and minute books

• Annual filings

• GST/HST, payroll, and compliance management

This means more paperwork and professional support.

3. Less Flexibility with Losses

Business losses in a corporation cannot be deducted against personal income, unlike a sole proprietorship.

This can be a disadvantage in the early stages of a business.

4. Money Is Not “Your Money”

Once income is earned by the corporation, it must be paid to you as:

• Salary

• Dividends

• Shareholder loans

Each option has different tax consequences.

When Does Incorporation Make Sense?

Incorporation may be beneficial if you:

• Earn consistent profits (often $70,000–$100,000+ annually)

• Want to defer taxes

• Face legal or financial risk

• Plan to grow or sell your business

If your income is modest or irregular, staying unincorporated may be more efficient.

How TiKi Tax Helps You Decide

At TiKi Tax, we don’t give one-size-fits-all advice. We:

• Analyze your current income and expenses

• Compare personal vs. corporate tax outcomes

• Advise on federal vs. provincial incorporation

• Handle incorporation, bookkeeping, and tax filings

Our goal is to help you choose the structure that maximizes tax efficiency and minimizes risk.

Thinking About Incorporation?

Incorporation can be powerful—but only when done at the right time and for the right reasons.

👉 Visit https://www.tikitax.ca/ to speak with a tax professional and find out whether incorporating your business is the right move for you.