TL;DR: Choose a sole proprietorship if you’re testing an idea, risk is low, and you want the simplest setup. Incorporate when you need liability protection, plan to grow, or will keep profits in the business.
TL;DR: Taxes, liability, and funding options are the big levers. If you’ll seek investors, sign bigger contracts, or consistently earn more than you need to live on, a corporation usually makes more sense.
What really matters: liability, taxes, and control
Sole proprietorships are simple: you and the business are the same legal entity. You keep full control, but you also take on unlimited personal liability for business debts and lawsuits. Profits are taxed on your personal return at your marginal rate.
Corporations are separate legal entities. They offer limited liability (with important exceptions) and flexible ways to pay yourself. Corporate profits are taxed at corporate rates, which can be lower for Canadian-controlled private corporations (CCPCs) on active business income eligible for the small business deduction.
Total tax can be similar once you pull all profits out, but corporations can defer tax by keeping money in the company for growth.
Quick decision checklist for busy founders
Risk: Could a claim or debt put personal assets at risk? If yes, lean corporation.
Profit level: Earning more than you need to live on? Incorporation may allow tax deferral.
Clients and contracts: Do customers require you to be incorporated? If yes, incorporate.
Team and equity: Multiple founders or future investors/shares? Incorporate.
Stage: Still testing with small, low-risk revenue? Start as a sole proprietorship.
Admin appetite: Want the lightest paperwork and cost? Sole proprietorship.
How taxes differ: income, dividends, and GST/HST
Sole proprietors report business income on their personal T1 return (Form T2125). You pay personal tax on net profit. You also pay both sides of Canada Pension Plan (CPP) contributions on your self-employment income. If you’re self-employed, you may opt into EI special benefits through Service Canada.
Corporations file a T2 corporate return each year. When you take money out, you typically use salary/bonus, dividends, or a mix. Salary is a business expense and creates RRSP room; dividends are paid from after-tax corporate profits and don’t create RRSP room. Canada’s tax system aims for “integration,” so total tax is broadly similar when all profits are paid out. The advantage appears when you can leave earnings inside the company for reinvestment.
GST/HST: You must register when your worldwide taxable revenues exceed $30,000 in a single calendar quarter or over four consecutive quarters (small supplier threshold). You can register earlier to claim input tax credits.
Quebec administers GST/HST and the Quebec Sales Tax (QST) through Revenu Québec for most registrants. Provinces like B.C., Saskatchewan, and Manitoba have separate PST rules. Registration requirements depend on what you sell and where your customers are.
Startup and ongoing costs you should expect
Sole proprietorship:
Low startup costs. You may register a business name (if using a trade name) and get licences. Accounting costs are typically lower. One personal tax return with a business schedule.
Corporation:
Higher setup costs (incorporation fees, name search, minute book, possible legal advice). Ongoing costs: annual corporate filings, T2 return, bookkeeping, payroll setup if you pay salary, and possibly extra-provincial registrations.
Expect incorporation and first-year professional fees to range from a few hundred to a few thousand dollars depending on DIY vs professional support and complexity.
Liability and risk: personal vs corporate
Sole proprietors have unlimited personal liability. If something goes wrong, your personal assets are on the line. Corporations provide limited liability, but it’s not absolute. You can still be personally liable for:
Personal guarantees you sign for leases or loans.
Unremitted payroll source deductions and GST/HST.
Negligence or wrongful acts.
Insurance still matters either way. For higher-risk activities or larger contracts, incorporation plus proper insurance is a common approach.
Pay yourself: salary, dividends, and CPP/EI
Sole proprietor: You take owner draws (not an expense). You pay CPP on net business income and create RRSP room. Filing deadline for self-employed individuals is June 15, but any balance is due by April 30.
Corporation: You can pay salary/bonus (deductible to the company, triggers CPP contributions and T4 reporting) or dividends (no CPP/EI, T5 slip). Owner-managers are often not insurable for EI under regular rules; confirm status with Service Canada. Many use a mix to balance cash flow, CPP, and RRSP room.
Funding, investors, and growth considerations
Corporations are better for raising money. You can issue shares to founders and investors, create stock option plans, and document ownership cleanly. Some grants and programs favour or require incorporated businesses. Lenders may still ask for personal guarantees, but a corporation helps formalize governance, ownership, and valuation.
If you’re aiming for venture capital, employees with equity, or R&D incentives (for example, SR&ED credits available with enhanced rates for eligible CCPCs), incorporation is usually the right move.
Provincial vs federal incorporation in Canada
Federal incorporation provides name protection across Canada and is a good choice if you’ll operate in multiple provinces or want national branding. You’ll still need to register extra-provincially wherever you carry on business.
Provincial incorporation can be simpler and sometimes cheaper if you mainly operate in one province. Name protection is limited to that province. Director residency rules and processes vary. At the federal level, there’s currently no Canadian residency requirement for directors.
Registration, licences, and business names
Sole proprietors using only their legal name may not need to register a business name. If you use a trade name, most provinces/territories require registration. Corporations choose a numbered or named company and complete a name search if using a name.
Depending on what and where you sell, you may need municipal or provincial licences (for example, food, trades, childcare). Set up CRA program accounts as needed: GST/HST (RT), payroll (RP), import/export (RM), and corporate income tax (RC).
Compliance: payroll, filings, GST/HST, and PST
Sole proprietors: Keep records, collect/remit sales tax if registered, and file T1 with business schedules. File by June 15 if self-employed; pay by April 30.
Corporations: Maintain a minute book, file annual returns with your corporate registry, file T2 within six months of year-end (tax payments are due earlier), issue T4s for salary and T5s for dividends, and remit payroll and sales taxes on schedule.
PST/QST: Separate registrations and rules in non-HST provinces and Quebec.
When to incorporate and when to stay sole
Consider incorporating when:
Your business carries meaningful risk or larger contracts.
You plan to retain profits to reinvest in growth.
There are multiple founders or future investors.
Customers or platforms require a corporation.
Stay a sole proprietor when:
You’re testing a concept with modest, low-risk revenue.
You want the lowest cost and simplest administration.
You expect to withdraw all profits to live on and don’t need liability protection.
How to switch later without costly mistakes
Many founders start as sole proprietors and incorporate later. To switch smoothly:
Use a proper asset transfer. A section 85 rollover can move assets (equipment, IP, goodwill) to your new corporation on a tax-deferred basis. Get advice on valuations and elections.
Open a new corporate bank account and stop using personal accounts for business. Set up a new CRA business number and program accounts for the corporation. Ask CRA to transfer GST/HST credits or balances where allowed.
Reissue contracts and invoices in the corporation’s name. Update licences, insurance, and registrations.
Note that sole proprietorship losses generally don’t transfer to the corporation.
Bottom line
If you want simplicity and you’re just getting started, a sole proprietorship is fine. If you’re building something bigger, want protection, or will reinvest profits, incorporating can set you up for growth. The right answer often depends on risk, cash needs, and your next 12–24 months. An accountant or lawyer can map the numbers and steps to your situation.
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