When starting a business in Canada, one of the first and most important decisions you'll face is choosing your business structure. For most small business owners, this means deciding between operating as a sole proprietor or incorporating as a corporation. Each option comes with its own pros, cons, and responsibilities.
In this article, we'll break down the key differences to help you make an informed decision.
A sole proprietorship is the simplest and most affordable business structure. It means that you, as the business owner, are the same legal entity as the business.
Key Features:
Easy and inexpensive to set up
You have full control of the business
All profits go directly to you
You are personally liable for all debts and obligations
Taxation: As a sole proprietor, you report business income on your personal tax return using the T1 form and a Statement of Business or Professional Activities (T2125). You’re taxed at your personal income tax rate.
Best For: Freelancers, consultants, and small business owners just starting out or operating on a smaller scale.
Incorporating means creating a separate legal entity for your business. This structure provides legal protection and potential tax advantages.
Key Features:
More complex and costly to set up and maintain
Offers limited liability (personal assets are generally protected)
Separate business bank accounts and records are required
May be eligible for lower corporate tax rates and other benefits
Taxation: Corporations file a separate T2 corporate tax return. Income left in the corporation is taxed at corporate rates, which can be lower than personal rates on the first $500,000 of active business income.
Best For: Businesses planning to grow, take on employees, seek investors, or protect personal assets.
If you're just starting out and want a low-cost, low-maintenance option, a sole proprietorship may be best. If you're looking for tax planning opportunities, personal asset protection, or are planning to scale, incorporating might be the smarter long-term move.
It’s always a good idea to speak with an accountant or business advisor to assess your specific situation.