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Most small business owners in BC reach a point where they ask: “Am I set up the right way?” It usually comes up around tax season, or when income starts climbing and the tax bill feels heavier than expected.
The answer often comes down to how your business is structured. Whether you operate as a sole proprietorship or incorporate your business affects how you pay yourself, how much tax you owe, and what options are available to you down the road.
Neither structure is automatically better. The right choice depends on your situation. But understanding the difference can help you make a more informed decision.
We put together a short video walking through the key questions to ask yourself before deciding. You can watch it below.
How You Pay Yourself as a Sole Proprietor
A sole proprietorship is the simplest business structure. There’s no legal separation between you and the business. The income your business earns is your income. You report it on your personal tax return, and you pay tax at your personal marginal rate.
You don’t technically “pay yourself” a salary. You simply draw money from the business as you need it. Those draws aren’t tax deductible. Instead, you’re taxed on your net business income regardless of how much you actually take out.
This simplicity is an advantage early on. There are fewer filing requirements, lower accounting costs, and less administrative overhead. For many people just starting out, or earning modest income from their business, a sole proprietorship makes good practical sense.
You can learn more about how we support sole proprietors and self-employed individuals on our self-employed accounting page.
How You Pay Yourself Through a Corporation
When you incorporate, your business becomes a separate legal entity. It earns its own income, files its own tax return, and pays its own taxes. You, as the owner, are an employee or shareholder of that corporation.
This creates two main ways to pay yourself.
Salary or wages. You put yourself on payroll, deduct the salary as a business expense, and report it as employment income on your personal return. This also generates RRSP contribution room, which can be useful for long-term planning.
Dividends. The corporation pays tax on its profits first, then distributes a portion to you as dividends. Canada’s tax system uses a concept called integration, which is designed so that the combined corporate tax plus personal dividend tax ends up roughly similar to what you’d pay on salary in many cases. In practice, dividends may be taxed somewhat differently depending on your income level, and at lower brackets the effective rate can be lighter. There are no CPP contributions on dividends, which reduces costs but also means less going toward your Canada Pension Plan.
Many incorporated business owners use a combination of both, and the right mix depends on factors like total income, retirement planning, and whether you have other sources of personal income. It’s the kind of planning that benefits from professional input. If you’re already incorporated or considering it, our incorporated business accounting services are built around exactly this type of work.
The $80,000 Question
One of the most common questions we hear is: “At what point does incorporating actually save me money?”
As a general guideline in BC, if your business is earning somewhere below the $70,000 to $80,000 range in net profit, the extra costs of incorporating often outweigh the tax savings. Those costs include a separate corporate tax return, payroll administration, legal fees, and ongoing compliance work.
The actual crossover point depends on your full picture. Other sources of personal income, how much you need to draw from the business versus how much you can leave in, your growth plans, and your appetite for additional admin all factor in. For many owners, the math starts to shift somewhere between $70,000 and $120,000 in net income, but there’s no single number that applies to everyone.
Once you’re in that range or beyond it, the gap between personal and corporate tax rates starts to matter. In BC, a Canadian-controlled private corporation (CCPC) can pay a combined federal and provincial rate in the range of 11% to 12.2% on active business income up to $500,000 (the small business limit). That rate can vary slightly year to year, and it may be reduced if the corporation earns significant passive income or shares the small business limit with associated corporations. Compare that to the personal marginal tax rate in BC, which can climb above 50% at higher income levels.
That difference creates room for tax deferral. Money that stays in the corporation is taxed at the lower rate and can be reinvested into the business. You only pay the higher personal rate when you eventually take it out.
We wrote a more detailed breakdown of how those rates work in our article on corporate tax rates in Canada for BC business owners.
Three Questions Worth Asking First
Before making a decision, it helps to step back and think about three things.
What industry are you in? Some industries carry more liability risk than others, and incorporation can provide a layer of legal protection that a sole proprietorship does not. That said, this protection is not absolute. You can still be held personally liable in situations involving negligence, personal guarantees on loans or leases, or director responsibilities like unremitted payroll taxes and GST. Contractors and trades professionals often benefit from incorporating for both tax and liability reasons, but the structure needs to be maintained properly. We work with many businesses in that space through our contractor and trades accounting services.
How much are you making? As mentioned, the tax math often starts to favour incorporation somewhere in the $70,000 to $120,000 range of net income, depending on your full situation. Below that range, simpler is often better. Above it, the potential savings are worth a closer look.
What are your future goals? If you’re planning to grow, hire employees, take on contracts that require incorporation, or eventually sell the business, structuring things properly now can save a lot of rework later. There’s also the lifetime capital gains exemption, which can shelter a significant amount of gain when selling shares of a qualifying small business corporation (QSBC). This isn’t available to sole proprietors. Not all corporations qualify, though. The shares need to meet specific asset tests at the time of sale and during the holding period, so advance planning with a professional is usually needed. The CRA provides guidance on how the exemption works and what conditions apply.
It’s Not Just About Tax
Tax savings get the most attention, but the decision isn’t purely a tax question.
Incorporation means more paperwork. You’ll need to file a separate corporate tax return (T2), potentially run payroll, maintain corporate records, and keep your business and personal finances clearly separated. If you’re not prepared for that level of administration, or if your income doesn’t justify the extra cost, staying as a sole proprietor is a perfectly reasonable choice.
On the other hand, incorporation can open doors. Some government contracts and larger clients require you to be incorporated. It can make it easier to bring on partners or investors. And it gives you more flexibility in how and when you take income.
If you’re weighing these trade-offs and want a clearer picture of where you stand, our small business tax planning guide for BC walks through the broader planning process.
What to Do Next
There’s no single right answer here. The best structure is the one that fits your income, your industry, and where you’re headed.
If your net income is still on the lower end, a sole proprietorship likely serves you well for now. If you’re in the range where the numbers start to shift, or if your business is growing steadily, it’s worth having a conversation with an accountant who understands your situation.
We work with small business owners across BC at various stages, from early sole proprietorships through incorporation and beyond. If you’d like to talk through your options, you’re welcome to reach out to us for a conversation.
