Selling Your Business: Why Incorporation Can Make a Big Difference

One of the most common questions entrepreneurs ask is:
“Does being incorporated make it easier to sell my business compared to being a sole proprietor?”

The short answer is: it depends. Incorporation doesn’t necessarily make your business easier to sell, but when it comes to the tax consequences of a sale, it can create a significant financial advantage if structured correctly.

The Tax Advantage of Incorporation When Selling

The primary benefit of being incorporated at the time of sale comes from one key tax rule: the Lifetime Capital Gains Exemption (LCGE).

In Canada, when you sell the shares of a qualified small business corporation, you may be eligible for the LCGE. This exemption allows you to avoid paying tax on a large portion of the gain from the sale of those shares.

Here’s an example:

• Let’s say you’re the sole shareholder of an incorporated company.

• You sell the business for $500,000.

• Because you’re selling shares (not just assets) of a qualified small business corporation, you can use the LCGE to eliminate tax on the gain.

If you had been operating as a sole proprietor, that same $500,000 sale would be taxed as business income—often at rates around 25% or more. For larger sales, this tax savings becomes even more impactful.

How Big Could the Savings Be?

The LCGE is currently in the range of $850,000 to $950,000, and it’s indexed over time. For simplicity, let’s assume a $1 million exemption.

Selling an incorporated business for $1 million could save you roughly $250,000 in taxes compared to selling as a sole proprietor.

Can a Sole Proprietor Incorporate Before Selling?

Yes. If you’re currently a sole proprietor, you may still be able to take advantage of this exemption by rolling your business into a corporation before the sale. However, this requires careful planning and professional guidance to meet the eligibility criteria.

Why Professional Advice Matters

If you’re thinking about selling your business, the structure matters—and so does the timing. Working with a qualified CPA and tax advisor can ensure you:

• Understand whether your business qualifies for the LCGE

• Structure the sale in a tax-efficient way

• Avoid missing out on hundreds of thousands of dollars in potential savings

Ready to Plan Your Exit?

Selling a business is one of the most significant financial events of your life. Whether you’re already incorporated or still operating as a sole proprietor, the right structure can dramatically change the outcome.