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Corporation vs. Sole Proprietorship - Tax Benefits & More

Olu Olu
Oct 29
2 min read

Updated: Oct 30

Choosing between operating your business as a sole proprietorship or incorporating it as a corporation is a pivotal decision that affects taxes, liability, and growth potential. Both structures have pros and cons, particularly when you compare tax implications for owners in Canada.

Tax Differences at a Glance

Here’s a clear, numbers-driven look at when each shines—for example, let's consider Manitoba residents earning around $100k.

In a sole proprietorship, all business income is taxed as personal income at your marginal tax rate. For $100,000 in Manitoba, that could mean paying upwards of 26–30% to personal taxes plus CPP and other contributions, leaving you with roughly $70,000–75,000 after tax. You don’t file separate business taxes, simplifying bookkeeping. However, all liabilities are on you personally.

In contrast, a corporation offers lower corporate tax rates—around 9% federally plus 0% provincial on the first $500,000 of active business income in Manitoba. So the corporation would pay about $9,000 in tax on $100,000 income and retain $91,000 post-tax. But when you withdraw funds as dividends for personal use, you'll face dividend tax (roughly 20-25%), leaving slightly less than employee net income overall, about $70,000–72,000 after both corporate and personal tax.

So, When Is a Corporation Better?

Tax Deferral: Corporations let you keep profits inside the business with low corporate taxes, deferring personal tax until you withdraw funds later. This is ideal if you plan to reinvest or save.
Income Splitting: Corporations can pay family members reasonable salaries or dividends, effectively lowering your family’s overall tax bill.
Limited Liability: Unlike sole proprietorships, corporations provide legal protection protecting personal assets from business risks.
Capital Gains Exemption: Sell qualifying shares and potentially shelter up to $1.25 million of gains from tax, which sole proprietors can’t.
Tax Planning Flexibility: Corporations allow strategic decisions on salary/dividend mix, expense deductions, and investment growth opportunities.

Summary Table

Feature	Sole Proprietorship	Corporation
Tax Rates	Marginal personal tax (up to ~30% in MB)	Small business rate ~9% federal + 0% provincial
Income Tax Payment	On whole business income	On corporate income first, then on dividends
Net Income After Tax	Approx. $70K-$75K	Approx. $70K-$72K after corporate & dividend tax
Liability Protection	Unlimited personal liability	Limited liability
Tax Deferral	No	Yes
Income Splitting	Not allowed	Possible
Setup & Admin Costs	Low	Higher (legal/accounting fees)
Capital Gains Exemption	No	Up to $1.25 million exemption

Final Thoughts

Incorporation makes sense if you want to grow your business, reinvest profits, use tax planning strategies, and protect your personal assets. For owners who need nearly all business income for personal expenses immediately, or prefer simple setup, a sole proprietorship could suffice.

Reach out to tailor tax planning strategies and benefit planning to your unique goals and circumstances.

If you need further support with your investments, insurance and taxes - Let’s Talk. I help clients across Canada build sustainable financial plans rooted in clarity and confidence.