When three IT consultants decide to work together under a shared brand, the first question is usually about structure: one corporation or several? The choice looks like a preference. It is not. It determines how income is taxed, how compensation is allocated, how the SBD limit is shared, who owns what, and what happens when someone wants to leave.
This guide covers the four main structures a small IT consulting firm can use, what each one solves, and where each one creates problems. The goal is to frame the decision clearly before one structure becomes locked in by default.
Why the Solo Contractor Structure Does Not Scale
A solo contractor incorporated in Canada operates a Canadian-Controlled Private Corporation (CCPC) that receives consulting income, pays a salary to the owner, and may distribute dividends. The structure is designed around one person: one income stream, one set of compensation decisions, one shareholder.
When a second or third consultant joins the picture, the same structure starts to handle questions it was not designed for.
Who owns what percentage of the corporation, and why? How are compensation decisions made when the shareholders have different roles and different income needs? What happens to the other shareholders’ interest if one person wants to leave or is bought out? What does equal ownership mean when contributions are not equal?
These questions do not appear in a solo CCPC because there is one person. In a multi-owner firm, they appear immediately and compound over time.
Four Structures
Structure 1: One Operating Corporation, Multiple Shareholders
All three consultants own shares in a single CCPC. The corporation receives all client revenue and pays compensation to each shareholder through salary, dividends, or a combination.
How it works. The corporation is the operating entity. Each consultant works for and through it. Revenue is pooled. Expenses are shared. Year-end compensation decisions are made inside the corporation.
Where it works. For a firm that operates as a genuine integrated unit, where clients hire the firm rather than specific individuals, and where the founders have agreed on how value will be allocated, a single corporation is clean. There is one set of books, one T2, one HST/GST account, one bank account. Overhead is shared without intercompany arrangements.
Compensation. The salary and dividend decision becomes more complicated with multiple shareholders. Each owner’s optimal compensation depends on their personal income, other income sources, whether they have a spouse, and their CPP planning goals. Paying equal dividends to shareholders with different personal tax situations will produce different after-tax results for each person, and that may not reflect their intent.
The Tax on Split Income (TOSI) rules are designed to limit income splitting among related parties. For a multi-shareholder consulting corporation, TOSI can apply to dividend income paid to a shareholder who does not meet an exception. The most relevant exception for an actively working partner is the excluded business test. CRA generally considers a person to be actively engaged on a regular, continuous and substantial basis if they work an average of at least 20 hours per week during the year, or did so during any five prior years. For IT consulting corporations where most income comes from services, the excluded shares exception typically does not apply because of the 90% services income threshold. A partner who is fully active should generally qualify under the excluded business test, but this should be confirmed for each person’s situation. If one partner steps back or materially reduces their involvement, TOSI may apply to their dividend income in that year.
SBD limits. The small business deduction applies to the first $500,000 of active business income earned through a CCPC, provided that income is not personal services business (PSB) income, which is excluded from the SBD entirely. A three-consultant firm billing at a combined rate of $250,000 to $400,000 each could approach or exceed the limit depending on profitability, since the SBD applies to active business income rather than gross revenue. The limit applies at the corporation level, so a single operating corporation has one $500,000 limit shared across all revenue.
Exit. When one shareholder wants to leave, the remaining owners need to buy out their shares or agree on terms. Without a shareholder agreement, the price, timeline, and mechanics of a buyout default to whatever can be negotiated at the time the person wants to leave. That is a difficult negotiation.
When to use it. A single operating corporation works best when all founders are genuinely active, contributions and compensation are agreed upon upfront, a shareholder agreement is in place before the firm starts operating, and no individual is already using a personal CCPC for other consulting work.
Structure 2: Three Separate CCPCs with Subcontracting
Each consultant operates through their own corporation. One corporation is the primary entity that holds the client relationships and invoices clients. The other two corporations invoice the primary corporation for their work as subcontractors.
How it works. Consultant A’s corporation holds the client contracts and receives all revenue. Consultant B and Consultant C’s corporations each invoice Consultant A’s corporation for their portion of the work. Each person retains their own corporate entity and can manage their own compensation independently.
Where it works. This structure is common when consultants came to the arrangement individually and each already operated their own CCPC before the collaboration started. It preserves each person’s existing structure and lets them manage compensation and retained earnings separately.
T4A obligations. Fees for services paid to a corporation may require T4A reporting where annual payments exceed $500. The reporting requirements should be reviewed for the specific arrangement.
Worker classification. Even with three separate corporations involved, CRA can examine whether the subcontracting arrangement reflects genuine independent commercial relationships or whether one party is functioning as an employee of another. If Consultant B works exclusively for Consultant A’s corporation, is directed by Consultant A on how to carry out the work, and has no ability to work for others, CRA may assess the arrangement differently than the parties have structured it. Worker classification does not depend on the corporate structure; it depends on how the working relationship actually operates.
Associated corporation risk. This is the most significant issue with the three-separate-CCPCs structure. If CRA determines that two or more of the corporations are associated, they share a single $500,000 SBD limit rather than each having their own.
Two corporations are generally associated when the same person controls both, or when a group of persons controls both corporations with sufficient overlap. If Consultant A and Consultant B together own more than 50% of each other’s corporations, or if there is a cross-shareholding arrangement, the associated corporation rules in section 256 of the Income Tax Act can link the SBD limits. The association analysis is fact-specific and depends on the actual shareholding and control arrangements.
Three consultants each operating their own independent CCPC with no cross-shareholding and no common control are not automatically associated simply because they work together or subcontract to each other. But arrangements that involve shared equity, shared control, or profit-sharing structures between the corporations should be reviewed before being implemented.
When to use it. This structure works when each consultant has an established independent practice, the collaboration is project-based rather than fully integrated, and the association risk has been assessed and does not apply. It is also the default structure when consultants begin working together informally before formalizing the arrangement.
Structure 3: Operating Corporation with Individual Holdcos
The operating corporation (Opco) is shared by all three consultants. Each consultant’s equity interest in Opco is held through their own holding corporation (Holdco) rather than personally.
How it works. Opco earns the consulting revenue and handles all operations. Opco may pay dividends to each Holdco through the inter-corporate dividend mechanism described below. Management fees from Opco to a Holdco are sometimes used but require that the Holdco is actually providing services to Opco, that the amount is reasonable in the circumstances, and that the arrangement is properly documented. Each consultant’s Holdco accumulates retained earnings, manages their personal investment portfolio, or holds real estate.
The purpose of Holdcos. The Holdco layer provides several planning options. Dividends paid from Opco to Holdco under the inter-corporate dividend rules are generally received free of tax at the Holdco level (subject to refundable dividend tax rules). This allows each consultant to accumulate capital inside their Holdco and defer personal tax until they withdraw funds from the Holdco. Holdcos may also help separate accumulated assets from operating business risks, and provide a vehicle for holding passive assets separately from the operating business.
Complexity and cost. The Holdco structure requires maintaining multiple corporate entities: one Opco and one Holdco for each consultant, which is four corporations for a three-person firm. Each corporation requires its own T2 return, its own books, and its own corporate bank account. The administrative cost and the cost of annual accounting are higher than for a simpler structure.
When to use it. A Holdco structure is typically useful when the partners are generating meaningful retained earnings in excess of what they need personally, when they have passive investment income they want to accumulate separately from the operating business, or when there is a longer-term estate planning goal that the Holdco layer supports. For a newly formed consulting firm that is still distributing most of its income to the partners, the complexity may not be warranted yet.
Structure 4: General Partnership
Two or more of the consultants operate as partners in a general partnership rather than through a corporation. The partnership earns income and allocates it to the partners according to the partnership agreement.
How it works. A general partnership is not a separate taxable entity. Income and losses flow directly to each partner and are reported on their personal tax returns (or through their individual corporations if the partners are themselves corporations). A partnership of corporations is often used when several consultants want to collaborate while preserving separate corporate structures. Depending on the circumstances, including whether any partner is a corporation and the partnership’s income level, the partnership may be required to file an information return (T5013). The partnership itself does not pay tax.
Where it fits. A partnership structure may be used when the parties want to share income and expenses without creating a new operating corporation, or when the individual partners are themselves corporations and the partnership is a vehicle for allocating income between them.
The liability issue. In a general partnership, each partner is personally liable for the obligations of the partnership, including the obligations incurred by other partners in carrying on partnership business. For most consulting firms, professional liability insurance and the fact that IT consulting does not typically carry the same liability profile as legal or medical services reduce this risk, but it is a meaningful distinction from the corporate structure.
Limited partnerships. A limited partnership allows passive investors or limited partners to participate in the economics of the firm without unlimited liability, while general partners manage operations and retain liability. Limited partnerships are more common in investment fund structures than in operating consulting firms, and are less relevant for a small IT consultancy.
When partnerships appear. In practice, many small consulting firms use the partnership structure implicitly, without formalizing it, when two or more consultants run a joint practice under one name, share clients, and split revenue informally. That informal arrangement carries the legal characteristics of a general partnership whether or not the parties intend it to, which affects liability and CRA reporting.
The Associated Corporation Question in Detail
The SBD limit question deserves direct attention because it is the most common source of unexpected tax cost in multi-owner consulting structures.
The small business deduction reduces the federal corporate tax rate on the first $500,000 of active business income from approximately 15% to approximately 9%. At the provincial level, the SBD further reduces the combined rate. For a corporation earning $350,000 in active business income that is not PSB income, the SBD represents a meaningful tax benefit.
When two corporations are associated, they share one $500,000 limit across both corporations. The limit is allocated between them by agreement, or CRA may allocate it in a manner that is unfavourable if no agreement is filed.
Association is triggered by common control. For example:
- If Consultant A holds a majority interest in Opco and also controls their own separate CCPC, those two corporations are associated because the same person controls both.
- If two or more unrelated consultants each co-own Opco and one of them also controls a separate CCPC, whether association exists depends on the specific shareholding and control analysis under section 256. Minority co-ownership of a shared Opco does not automatically create association with a shareholder’s own separate CCPC, but cross-shareholdings or other control arrangements between the corporations can.
The association rules are in section 256 of the Income Tax Act and involve several deeming rules and attribution provisions that can produce counterintuitive results. Structures involving multiple shareholders, multiple corporations, and intercompany arrangements should be reviewed for association before being implemented.
Choosing a Structure
No structure is universally better. The right choice depends on how integrated the firm’s operations actually are, how the partners intend to handle compensation, whether each partner already has an existing CCPC, the likely revenue level and proximity to the SBD limit, and what exit provisions the partners want in place from the start.
The questions worth answering before choosing:
How integrated is the work? If the three consultants each have their own clients, their own billing arrangements, and their own workflows, and the collaboration is primarily branding and referral, the three-separate-CCPCs structure may reflect how the business actually operates. If clients hire the firm and the firm assigns people to projects, a single operating entity is a closer match.
How different are the partners’ compensation needs? If one partner needs higher ongoing income and another wants to accumulate retained earnings, the structure needs to accommodate that. A single Opco with equal dividend policies does not handle it. Separate corporations or a Holdco structure may be better.
What is the SBD exposure? For a firm billing more than $500,000 combined, the SBD limit is a real consideration. For a firm billing $300,000 total, it may not be for several years.
Is a shareholder agreement in place? Most multi-owner consulting firm disputes arise from governance and compensation questions rather than tax planning. One partner stops contributing but still owns one-third of the company. Two partners want to grow; one wants to stay small. A client relationship that one partner built leaves with them. These situations have better outcomes when the mechanics are agreed on before they arise. For any structure involving shared equity in a corporation, a shareholder agreement that covers compensation decisions, valuation on exit, deadlock, and what happens if a partner leaves or becomes unable to work is important to have before the firm starts operating, not after a dispute arises.
What the Books Need to Reflect
Regardless of structure, a consulting firm with multiple owners needs books that can answer several questions cleanly: what each client engagement cost to deliver, what each partner earned versus what they received, what the firm owes each partner, and what the SBD exposure looks like at year end.
Project-level tracking in QuickBooks or similar software allows revenue and direct costs to be allocated per engagement. Without it, the firm’s financial statements show combined results that cannot be disaggregated by client, project, or person, which makes compensation decisions and profitability analysis harder than they need to be.
Related Articles
- When Does an IT Contractor Become a Consultancy? covers the functional signals that mark the transition to a consultancy and what the accounting and tax implications are at that stage.
- Salary vs. Dividend for Incorporated IT Contractors covers the compensation decision for a single shareholder. The same trade-off is more complex when two or three shareholders have different personal situations.
- Personal Services Business Risk for Incorporated IT Contractors covers how CRA assesses the PSB question, which is relevant when subcontracting arrangements are part of the structure.
Scope of This Article
This article covers the structural options available to a small IT consulting firm with two to four owners and the key tax and accounting considerations involved in choosing among them. It does not cover:
- The legal mechanics of incorporating, issuing shares, or structuring a partnership
- Shareholder agreement drafting or the legal terms of buy-sell provisions
- Specific TOSI calculations or the CRA’s published guidance on excluded shares and excluded businesses
- Province-specific SBD rates or Quebec-specific rules for multi-shareholder CCPCs
- Estate planning considerations or family trust structures
The goal is to make the trade-offs between structures visible before one becomes the default. Most structural problems in consulting firms are easier to solve before the firm starts operating than after it has been running for two or three years under an arrangement that does not fit how the business actually works.
Get in touch if you are setting up or restructuring a consulting firm and want to review which structure fits your situation.