Sole Proprietorship or Corporation: Which Is Right in Canada?
Short answer: A sole proprietorship is you doing business in your own name: simple, low cost, and you are personally responsible for its debts. A corporation is a separate legal entity with its own tax return, more paperwork and limited liability. Which one fits depends on your profit, your risk and your plans.
A sole proprietorship is an unincorporated business owned by one person. A corporation is a legal entity that is separate from its owners, who hold shares in it. This article explains what changes when you pick a sole proprietorship or corporation. The choice itself is one to make with your accountant and your lawyer.
What is the difference between a sole proprietorship and a corporation?
The main difference is legal: a sole proprietor and the business are the same person, while a corporation is its own "person". Almost every other difference follows from that.
Sole proprietorship | Corporation | |
Legal status | No separate legal status from the owner | Separate legal entity that can own property and sign contracts in its own name |
Who owns it | One individual | Shareholders |
Debts and risks | The owner takes on all the risks, including personal property and assets | Shareholders have limited liability, with exceptions |
Income tax return | Owner's T1 personal return, with Form T2125 | T2 corporation return, every year |
Losses | The owner claims them | Shareholders cannot claim the corporation's losses |
How the owner is paid | The profit is the owner's income | Salary, dividends, or both |
Life of the business | Tied to the owner | Continues until it is wound up, amalgamated or gives up its charter |
The Canada Revenue Agency (CRA) describes both structures on its sole proprietorship and corporation pages.
How is each one taxed in Canada?
A sole proprietor pays personal income tax on the net income of the business. A corporation pays corporate income tax on its own profit, and the owner then pays personal tax on what they take out.
Sole proprietorship.
You report the business income or loss on your T1 return, with Form T2125 or financial statements.
For the 2025 tax year, self-employed individuals had until June 15, 2026 to file. Any balance owing was still due April 30, 2026.
You may have to pay Canada Pension Plan (CPP) contributions on your self-employed earnings.
You may have to pay your income tax and CPP by instalments.
Corporation.
It files a T2 return no later than six months after the end of every tax year, even if it owes no tax.
It attaches financial statements or the General Index of Financial Information (GIFI).
As of 2026, the net federal rate is 9% for a Canadian-controlled private corporation claiming the small business deduction, and 15% on other income after the general tax reduction.
Each province or territory adds its own rate. The CRA lists them on its corporation tax rates page.
A corporation usually pays its tax in monthly or quarterly instalments.
Money left in the corporation is taxed at the corporate rate only. Once you pay it to yourself, you pay personal tax on it. See salary or dividends for how each one works.
Does a corporation protect my personal assets?
Partly. The CRA says shareholders have limited liability, which means they are not responsible for the corporation's debts. It also says limited liability may not always protect you from creditors.
Personal guarantees. A bank or other creditor may ask a shareholder of a small corporation to guarantee a loan. If you sign, you are personally liable for that debt if the corporation does not pay.
Directors' liability. Directors may have to pay amounts the corporation failed to deduct, withhold, remit or pay under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan and the Excise Tax Act. In plain words: payroll deductions and GST/HST.
A sole proprietor has no such wall. The CRA says the risks of the business extend to your personal property and assets. Ask a lawyer how this applies to your business, and an insurance broker about coverage.
What does it cost to set up and run each one?
A sole proprietorship costs less to start and to keep. A corporation costs more on both counts.
Sole proprietorship | Corporation | |
Ontario registration (as of 2026) | $60 | $300, plus a Nuans name search report unless you use a number name |
Federal incorporation | Not applicable | $200 online |
Yearly corporate filing | None | Annual return ($12 online for a federal corporation) |
Income tax return | Part of your T1 | Separate T2, with financial statements or GIFI |
Bank account | Separate account needed if the business name is not your own | In the corporation's name |
Fees are from the Ontario Business Registry and the Corporations Canada Online Filing Centre. Other provinces set their own fees.
A corporation also needs more professional work each year: year-end financial statements and a T2 return from an accountant, and corporate records kept up to date. Ask for quotes before you decide.
Sole proprietorship or corporation: when does it make sense to incorporate?
There is no single income level or date. These are the points owners usually weigh with their accountant and lawyer:
Profit you do not need to live on. Profit left in a corporation is taxed at the corporate rate until you take it out.
Risk. Limited liability matters more when the business signs leases, carries debt or could be sued.
Growth. The CRA notes a corporation can generally raise capital more easily, and shares can be bought and sold without ending the business.
Losses. A sole proprietor claims a business loss on their own return. A shareholder cannot claim the corporation's loss.
Cost and paperwork. A corporation has more of both, every year.
Should I incorporate federally or in my province?
Both give you a corporation. You incorporate federally through Corporations Canada, or provincially through your province's registry, such as the Ontario Business Registry.
Federal incorporation costs $200 online. Ontario incorporation costs $300.
A federal corporation files an annual return with Corporations Canada.
Corporations Canada lists registering a federal corporation in a province or territory as a separate service, with a variable cost.
Name rules and filings differ between the two. Your lawyer can tell you which fits your plans.
What changes in my books and filings after I incorporate?
The corporation starts with a clean set of books and its own CRA accounts. According to the CRA's change of legal status page:
You register the new corporation with the incorporating authority, even if you already have a business number (BN).
The corporation gets a new BN, with a corporation income tax (RC) account attached to it.
GST/HST and payroll accounts tied to your old BN are not moved to the new one. You register new ones on the new BN if you need them.
You close the old BN and the CRA accounts tied to it.
In the books, that usually means:
a new bank account in the corporation's name
a new accounting file that starts on the incorporation date
your pay recorded as salary through payroll or as dividends, not as owner's draws
a shareholder loan account to track money moving between you and the company
a year-end package for the accountant who prepares the financial statements and the T2
We keep the books for both sole proprietors and corporations. When a client incorporates, we help set up the new QuickBooks Online file and the new payroll and GST/HST accounts. Our prices are published, you build your own plan and pay only for what you need, and they are the same across Canada. See pricing and services.
Frequently asked questions
Can I incorporate with no employees?
Yes. A corporation needs shareholders and directors, not employees. For a federal corporation, Corporations Canada says one individual can be the sole shareholder, director and officer.
Do I get a new business number when I incorporate?
Yes. A new BN is registered with the CRA for the corporation. The CRA asks you to close the old BN and the accounts tied to it.
Can I switch from a sole proprietorship to a corporation later?
Yes. The CRA treats it as a change of legal status, from sole proprietorship to corporation. Ask your accountant how to move the business into the corporation before you transfer anything.
Do I still need a GST/HST account after I incorporate?
The corporation needs its own. The CRA does not move the GST/HST account from your old BN to the new one. See when to register for GST/HST and confirm the timing with your accountant.
Sources
Sole proprietorship - Canada Revenue Agency (modified August 17, 2026)
Corporation - Canada Revenue Agency (modified August 17, 2026)
Corporation tax rates - Canada Revenue Agency (modified May 30, 2025)
Change of legal status - Canada Revenue Agency (modified June 30, 2026)
2026 tax deadlines for Canadian businesses and self-employed individuals - Government of Canada
About Remote Bookkeeping
Remote Bookkeeping is a Canadian-owned firm that provides monthly bookkeeping, financial reporting, payroll, HST/GST filing, year-end preparation and QuickBooks Online setup for small businesses across Canada. It was founded by Lia and George, who bring more than 30 years of combined experience. Call (289) 867-0808 or 1-800-880-9141. Related reading: Bookkeeper vs Accountant: What Is the Difference in Canada?
This article is general information for Canadian small business owners. It is not tax, legal or accounting advice for your particular situation. Rates and thresholds change - always confirm against the source linked above or ask us.
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