Sole Proprietorship vs Corporation in Canada: Which Is Right for You?

Sole proprietorship vs corporation comes down to liability, tax and cost. A sole proprietorship is cheap to start (an Ontario business name costs $60), but you are personally liable for every business debt. A corporation costs $300 to incorporate in Ontario, is a separate legal entity, and can pay a combined 11.2% small-business rate on active business income.

Neither structure is better for everyone. This guide compares them side by side, explains how each is taxed in general terms, and covers when incorporating typically starts to make sense. Ontario figures are used as the example.

Sole proprietorship vs corporation: quick comparison

What is a sole proprietorship?

The CRA describes a sole proprietorship as an unincorporated business owned by one person and calls it the simplest business structure. You make every decision and keep every dollar of profit. The business has no legal existence separate from you.

In Ontario you can start a sole proprietorship under your own name without filing anything. If you use any other name, you must register it under the Business Names Act: $60 online, valid for five years. Our guide to business name registration in Ontario walks through the process.

What is a corporation?

A corporation is a separate legal person. It can enter into contracts and own property in its own name, it is owned by shareholders and managed by directors, and it keeps existing when shares change hands. In Ontario you incorporate under the Business Corporations Act (OBCA) through the Ontario Business Registry. The fee is $300, and online filings are approved immediately. You can also incorporate federally for $200 online, but a federal corporation that operates in Ontario reports to both registries.

Liability: who pays if the business can't?

This is the biggest practical difference. A sole proprietor has unlimited personal liability. In the CRA's words, the risks extend even to your personal property and assets. A judgment against the business is a judgment against you.

A corporation's shareholders are generally not liable for its debts. If it fails, they lose what they invested. That protection has limits worth knowing:

• Personal guarantees: lenders and landlords often ask small-business owners to guarantee corporate loans or leases personally. A guarantee makes you liable for that debt.
• Directors' liability: directors can be personally liable for unremitted payroll deductions and GST/HST.
• Your own conduct: incorporating doesn't shield you from liability for your own professional negligence or wrongdoing.

Insurance matters for both structures. A corporation adds a layer of protection but does not replace good coverage.

How is a sole proprietorship taxed compared with a corporation?

This section explains general rules only. It isn't tax advice. Ask an accountant to run the numbers for your situation.

Sole proprietorship

Business profit is your personal income. You report it on your T1 return, usually with Form T2125, and pay tax at your personal marginal rates, which rise as income rises. You pay tax on the profit in the year you earn it, whether or not you take the money out. The owner claims any business losses.

Corporation

The corporation pays its own tax and files a T2 return within six months of every tax year-end, even when it owes nothing. A Canadian-controlled private corporation (CCPC) can claim the small business deduction on its first $500,000 of active business income. In Ontario that means a federal rate of 9% plus a provincial rate of 2.2% (from July 1, 2026, down from 3.2%), for a combined 11.2%.

The low rate is not the whole story. When you pay yourself a salary or dividends, that money is taxed again in your hands at personal rates. Canada's tax system is designed to roughly integrate the two layers. The main benefit of incorporating is usually deferral: profit you leave in the corporation to reinvest is taxed at the low corporate rate until you withdraw it. If you need every dollar of profit to live on, the tax advantage is much smaller.

CPP: what changes when you incorporate?

As a sole proprietor you pay both the employee and employer CPP contributions on your self-employment earnings through your T1 return. For 2026 the rate is 5.95% on each side, on earnings between the $3,500 basic exemption and the $74,600 maximum. That works out to a maximum of $8,460.90 for a self-employed person, before any second additional contribution (CPP2) on higher earnings.

An incorporated owner can choose how to be paid. A salary attracts CPP like any employment income: the corporation pays the employer half and deducts your half, so the total is similar. Dividends are not pensionable earnings, so no CPP is paid on them, but they don't build CPP retirement benefits either. The right mix depends on your income, retirement plans and RRSP room, which is a good conversation to have with an accountant.

Costs and paperwork

Both structures register for HST once taxable revenue exceeds $30,000 in a calendar quarter or over four consecutive quarters. For a full breakdown of incorporation costs, see how much it costs to incorporate in Ontario.

Raising money and continuity

A corporation can usually raise more capital than a sole proprietorship. It can issue shares to partners or investors, set up different share classes, and bring in new owners without restarting the business. A sole proprietorship can't sell a share of itself. It borrows on the owner's personal credit, and adding a co-owner turns it into a partnership.

A corporation also keeps existing until it is wound up, amalgamated or dissolved, regardless of changes in ownership. A sole proprietorship ends when the owner stops or dies, which makes selling or passing on the business more complicated.

When to incorporate: signs it may make sense

There is no official income threshold. These are the situations where owners and their accountants most often decide incorporating is worth it:

• Profit exceeds what you need to live on. Leaving surplus profit in the corporation is where the deferral benefit comes from.
• Real liability risk. You sign contracts, hire employees, carry inventory or lease space.
• Clients prefer it. Some larger clients only contract with incorporated businesses.
• You plan to bring in partners or investors, or eventually sell the business.
• You want a holding structure for investments or future planning.

Staying a sole proprietor often makes sense while you're testing an idea, earning modest profit, expecting early losses you'd like to offset personally, or keeping costs and admin to a minimum.

Can I switch from sole proprietorship to corporation later?

Yes, and many businesses do. You incorporate a new corporation and transfer the business assets, such as equipment, contracts and goodwill, into it. Under section 85 of the Income Tax Act, you and the corporation can jointly elect, on CRA form T2057, to make the transfer at an agreed amount that can defer tax on any gain. You must receive at least one share as part of the payment. The details are technical, so have an accountant prepare the election.

You'll also need to cancel or transfer your business name registration and move your HST account, bank accounts and contracts to the corporation.

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