Legal structure is one of the first ownership decisions a business makes, often without much reflection. For many immigrant entrepreneurs, incorporation or registration happens early, sometimes through an accelerator, recommendation, or free service, before revenue exists.
The structure chosen does not determine whether a business succeeds. But it does determine how money moves, where risk sits, and when income becomes personal. Those mechanics matter more over time than most founders expect.
In Canada, most small businesses operate as sole proprietorships, partnerships, or corporations. Each structure behaves differently once activity begins.
How Sole Proprietorships, Partnerships, and Corporations Behave in Practice
A sole proprietorship is the simplest structure. The owner and the business are legally the same. All profits flow directly to the owner’s personal tax return and are taxed as personal income, whether or not cash is withdrawn. There is no separation between business activity and personal finances.
Partnerships function similarly for tax purposes. The business itself does not pay tax. Each partner reports their share of income personally, based on the partnership agreement. Liability and complexity increase, but income still flows through.
A corporation introduces separation. The business becomes its own legal entity. Income belongs to the company first. The owner is taxed personally only when they pay themselves, either through salary or dividends. This changes timing, not the existence of tax.
Illustrative comparison using $100,000 in revenue
Assumptions for illustration only:
- Revenue: $100,000
- Expenses: $40,000
- Net income: $60,000
- Approximate rates used to demonstrate structure, not exact outcomes
| Structure | Where income is taxed | What happens to the $60,000 | What this means for the owner |
| Sole proprietorship | Personal tax return | Entire $60,000 is treated as personal income | You are taxed on all profits even if you leave money in the business. The business cannot hold income separately from you. |
| Partnership | Personal tax returns | Each partner is taxed on their share | Income flows through to you personally based on ownership, regardless of cash withdrawals. |
| Corporation (all withdrawn) | Corporate first, then personal | Company earns $60,000, pays corporate tax, then pays owner | If you withdraw everything, personal take-home often resembles a sole proprietorship after tax. Structural benefit is limited. |
| Corporation (partially retained) | Corporate first | Portion of the $60,000 remains inside the company | The business can retain income for reinvestment or future use. Personal tax is deferred until you pay yourself. |
The distinction is not that corporations reduce tax automatically. It is that corporations allow income to exist without becoming personal income immediately. This difference is often misunderstood. Incorporation does not create cash for the owner. It creates control over timing.
There is no minimum revenue threshold required to incorporate in Canada. Even very small businesses can be incorporated. The more relevant question is whether the business is meant to function as an income stream or as an asset that retains earnings.
The small business deduction, in context
Canadian-controlled private corporations may qualify for the small business deduction on active business income, resulting in a lower corporate tax rate on income retained inside the company.
This is not a personal tax advantage by default. The benefit is deferral. Money can remain in the business, taxed at the corporate level, until the owner chooses to withdraw it. Personal tax applies at the point of payment, not when income is earned.
This structure works best when the owner does not need all profits personally and expects to reinvest, manage uneven income, or build the business over time. When all profits must be withdrawn immediately, the structural advantage largely disappears.
When structure aligns and when it doesn’t
Sole proprietorships tend to align with early or low-risk activity where simplicity and immediate income matter more than flexibility. Corporations tend to align with businesses that are being built deliberately, where timing, reinvestment, or separation matters.
Neither structure is permanent. Many businesses change form as activity stabilizes. The mistake is not choosing one over another. The mistake is assuming structure creates outcomes.
Registration and licensing considerations
Regardless of structure, Canadian businesses must register appropriately, obtain a Business Number, open a business bank account, and comply with industry or municipal licensing requirements. Corporations involve additional filings and ongoing compliance.
For immigrants, the available legal structures are the same as for Canadian-born founders. However, immigration status can affect whether an individual may actively operate or work in the business. This distinction matters more than structure itself.
Legal structure shapes how ownership behaves. It does not replace clarity, demand, or execution. Choosing a structure is less about optimization and more about aligning mechanics with how the business is actually expected to operate.
