Introduction
If you’re a small business owner in Alberta—whether you’re just getting started or already operating a profitable venture—one of the most important decisions you’ll face is whether to incorporate or remain a sole proprietor. This choice can significantly impact your tax obligations, liability exposure, and long-term business growth potential.
As a CPA firm based in Alberta, we help entrepreneurs and small business owners navigate this decision with confidence. Here’s what you need to know.
What Is a Sole Proprietorship?
A sole proprietorship is the simplest business structure. It’s an unincorporated business owned and operated by one individual. There’s no legal distinction between the business and the owner—meaning you report your business income on your personal tax return.
Key Features:
- Low startup cost and easy to register
- Minimal regulatory requirements
- Business profits are taxed at your personal marginal tax rate
- You are personally liable for all business debts and legal claims
What Is Incorporation?
Incorporation is the legal process of forming a separate legal entity known as a corporation. Once incorporated, your business has its own legal status, separate from you as the owner or shareholder.
Key Features:
- The corporation files its own tax return (T2 Corporate Return)
- You may pay yourself via salary or dividends
- Offers limited liability protection for shareholders
- Can be more tax-efficient if profits are retained or reinvested
Pros and Cons: Sole Proprietorship vs Incorporation
| Feature | Sole Proprietorship | Incorporated Business |
|---|---|---|
| Startup Cost | Low | Moderate to High |
| Liability Protection | None – personal assets at risk | Limited liability for shareholders |
| Tax Rate | Personal income tax rate | Corporate tax rate (as low as 11% in Alberta)* |
| Administrative Burden | Low – simpler reporting | Higher – separate bookkeeping and tax filings |
| Access to Capital | Limited | Easier to attract investors or business loans |
| Business Continuity | Ends with the owner | Corporation lives beyond the owner |
*Small business corporate tax rate in Alberta as of 2025
When Does Incorporating Make Sense?
Incorporation may be the right move if:
- You’re earning consistent profits and want to reinvest in your business
- You’re planning to hire employees
- You’re exposed to legal or financial risks
- You want to separate personal and business finances
- You’re preparing to sell your business or bring on investors
When Is a Sole Proprietorship a Better Fit?
Staying a sole proprietor might be best if:
- Your income is low or inconsistent
- You’re testing a new business idea
- You want to minimize costs and admin
- You prefer simple tax filing through your personal return
What About Taxes?
For sole proprietors, business income is reported on your T1 personal tax return using a Statement of Business Activities (Form T2125). This income is taxed at your personal marginal rate, which can climb quickly.
Corporations in Alberta pay a federal and provincial combined small business tax rate, currently around 11% on the first $500,000 of active business income. However, extracting income from the corporation via salary or dividends comes with its own tax implications.
At KalimCPA, we help Alberta-based business owners structure their income to maximize tax efficiency and long-term wealth.
Final Thoughts: Choose the Right Path for Your Business Growth
Choosing between incorporation and operating as a sole proprietor depends on your business goals, risk tolerance, and income level. There’s no one-size-fits-all answer—but making the right choice can unlock better protection, savings, and growth opportunities.
Need Help Deciding?
At KalimCPA, we specialize in tax planning and business advisory services for incorporated businesses and growth-minded entrepreneurs across Alberta. If you’re unsure which structure is right for you, let’s talk.
