The beginning of the year is usually reserved for budgeting and forecasting. While you review your numbers, it’s also worth reviewing the legal structure your business operates under.
Your business structure influences more than day-to-day operations. It affects:
- How income is taxed
- How results are reported to the Canada Revenue Agency
- How much personal risk you carry as a business owner
- What planning flexibility is available as your business evolves
The legal structure you chose when you first registered your business may have been the right fit at the time. But as you grow, “simple” can become expensive.
Effective tax planning strategies and reviewing your structure annually can help reduce inefficiencies and ensure your legal standing matches your current reality.
Why Business Structure Matters for Canadian Businesses
Your business structure influences more than how your business is registered. It affects how income is taxed, how it’s reported to the Canada Revenue Agency, and how much personal risk you carry as a business owner.
In Canada, different structures come with different filing requirements and planning considerations. Over time, changes in revenue, risk exposure, and personal goals can make a previously suitable structure less effective.
This is why many business owners review their structure annually as part of broader business planning.
When It Makes Sense to Incorporate or Revisit Your Structure
There is no single point at which a business must change its structure. However, certain developments often signal that a review is worth considering.
These can include:
- Revenue or profit growth
- Hiring employees or contractors
- Increased contractual or operational risk
- Excess cash beyond personal living needs
- Changes to long-term financial goals
Plans for reinvestment, financing, or succession can also prompt a reassessment. These factors don’t automatically mean incorporation is required, but they’re strong indicators that your current structure may be outdated.
How to Review Your Business Structure at the Start of the Year
A structure review does not need to be complicated, but it should be intentional.
At the start of the year, it can help to review last year’s income and tax results, reassess current and anticipated risk exposure, and consider how compensation and cash flow needs may be changing. Aligning your structure with this year’s business planning priorities can help reduce surprises later in the year.
In some cases, restructuring requires additional tax planning to avoid unintended consequences, which is why these conversations are often best had early.
Understanding the Two Most Common Business Structures in Canada
Most Canadian business owners operate as either a sole proprietorship or a corporation. While both are common, they function very differently in practice, especially as a business grows.
Understanding how each structure works provides the foundation for deciding whether your current setup still makes sense.
What Is a Sole Proprietorship?
A sole proprietorship is a sole ownership business where the business and the owner are treated as the same entity.
Key characteristics include:
- Business income and expenses are reported on the owner’s personal tax return
- All net income is taxed at personal tax rates
- The owner is personally responsible for business debts and obligations
- Administrative requirements are generally simpler than for corporations
What Is a Corporation?
A corporation is a separate legal entity from its owners and operates independently for tax and legal purposes.
Key characteristics include:
- The corporation files its own corporate tax return
- Business income is taxed separately from the owner’s personal income
- Personal and business liabilities are generally separated
- Additional compliance and record-keeping requirements apply
Sole Proprietorship vs Corporation: Key Differences
When comparing sole proprietorship vs corporation, the differences tend to become more meaningful as a business matures. These distinctions often affect tax outcomes, risk exposure, and planning flexibility.
Corporate Tax Rates vs. Personal Tax: Treatment and Reporting
Taxation is one of the most common reasons business owners revisit their structure.
Sole proprietorship
- All business income is reported on the owner’s personal tax return
- Income is taxed at personal rates in the year it is earned
- You must pay tax on every dollar of profit; there is no ability to defer tax
Corporation
- The corporation files a separate tax return
- Business income is taxed at corporate rates before personal withdrawals
- Retaining income in the corporation can create tax deferral opportunities
- In Ontario, qualifying corporations benefit from the lower small business tax rate
In Ontario, qualifying corporations benefit from lower small business corporate tax rates, though personal tax applies when funds are withdrawn. There is no structure that is always more tax efficient. Outcomes depend on income levels, cash needs, and long-term planning goals.
Business Liability Protection and Risk Exposure
Liability considerations often become more important as a business grows.
Sole proprietorship
- No legal distinction between the owner and the business
- Personal assets may be exposed to business liabilities
Growth, staffing, and contractual obligations can increase personal exposure under a sole proprietorship.
Corporation
- Legal separation between the owner and the business
- Liability is generally limited to the corporation, subject to certain exceptions
Personal exposure is typically lower, though guarantees and director obligations can still apply.
Paying Yourself: Salary vs Dividends
Compensation planning is another area where the differences between sole proprietorship versus corporation become more apparent.
Sole proprietorship
- All business income flows directly to the owner
- The owner cannot choose how income is taxed
Corporation
- Owners can choose to pay themselves through salary, dividends, or a combination of both
- This flexibility allows for more intentional planning around dividends vs salary, cash flow needs, and personal tax exposure
Administration and Compliance
Administrative requirements are part of the trade-off when comparing structures.
Sole proprietorship
- Fewer filing requirements
- Income and expenses are reported as part of the personal tax return
Corporation
- Annual corporate tax filings are required
- Corporate records must be maintained
- Additional federal and provincial obligations apply, including registering a business in Ontario and maintaining appropriate licenses
Common Misconceptions About Incorporating a Business in Canada
It’s common for business owners to assume that incorporation automatically reduces taxes or that sole proprietorships are only suitable for small or early-stage businesses.
In reality, incorporation introduces planning opportunities, but it also adds complexity and compliance. Whether it makes sense depends on income levels, risk exposure, and long-term objectives. Even once incorporated, your structure should continue to be reviewed as circumstances evolve.
There is no universally best structure for every Canadian business. What matters is whether your current business structure still fits your situation today.
Reviewing your structure at the start of the year can support clearer tax planning, better risk management, and more informed decision-making as your business evolves.
Need help reviewing your business structure or understanding how it affects your tax planning for the year ahead?
Our team can walk through your current setup, discuss planning considerations, and help you understand whether any changes make sense for your goals.
Request a consultation through our Contact Us page or call us directly at 416-646-0550 to review your options.