Should You Incorporate in Canada or Stay a Sole Proprietor?
A Layman's Guide to Making the Right Decision to InCorporate
If you're self-employed in Canada and working alone, you've likely asked yourself this question at some point:
“Should I keep operating as a sole proprietor, or should I incorporate my business?”
This is a critical question—and one that could have long-term implications for your taxes, liability, business growth, and even your retirement. While the answer varies depending on your situation, this guide is designed to give you a clear, practical understanding of the pros and cons of incorporating vs. remaining a sole proprietor in Canada, especially if you're working alone in your own Canadian-Controlled Private Corporation (CCPC).
Let’s break it all down in simple terms.
What Is a Sole Proprietor?
A sole proprietor is an individual who owns and runs a business in their own name or under a registered business name. You and your business are legally the same entity. Income earned from the business is reported on your personal tax return.
Common Examples:
Freelance graphic designers
Tutors
Contractors
Coaches
Consultants
Delivery drivers
Real estate agents
What Is Incorporation?
When you incorporate a business, you’re creating a separate legal entity from yourself. The corporation can enter into contracts, own assets, take on debts, and pay taxes separately from you.
In Canada, most small business owners who incorporate form a Canadian-Controlled Private Corporation (CCPC), which offers specific tax benefits and incentives.
Case Study 1: Meet John – A Freelance Web Developer
John is a freelance web developer in Toronto earning about $90,000 a year. He works from home, has no employees, and bills clients under his own name.
As a Sole Proprietor:
He reports his business income on his personal tax return.
He pays personal income tax rates, which are progressive and can go as high as 53.53% in Ontario.
If he gets sued by a client, his personal assets (car, house, savings) are at risk.
If He Incorporates:
His corporation pays a small business tax rate of around 12.2% (in Ontario for the first $500,000 of active business income).
He can leave some profits inside the corporation and defer personal taxes.
He gains limited liability protection.
He can pay himself via a salary or dividends, giving him flexibility in tax planning or just go with the supervised Corporate Tax Planning route to withdraw corporation profits tax-free.
Advantages of Incorporating in Canada
1. Lower Corporate Tax Rates
The small business tax rate in most provinces ranges between 9% and 15%, compared to personal tax rates which can reach over 50%.
💡 Tip: You only benefit from this if you're not spending all the business income for personal use. If you earn $100,000 but only need $60,000 to live on, the rest can stay in the corporation and be taxed at the lower rate.
2. Limited Liability
If you're sued or your business owes money, your personal assets are generally protected if you operate through a corporation. As a sole proprietor, you are the business—meaning you’re personally liable for everything.
3. Lifetime Capital Gains Exemption (LCGE)
If you ever sell your incorporated business, you may qualify for the LCGE, which allows you to earn up to $1 million in capital gains tax-free (if certain conditions are met). This benefit does not exist for sole proprietors.
4. Tax Planning and Income Splitting
Incorporation allows for greater tax flexibility:
You can pay yourself via dividends or salary, depending on what's more tax-efficient.
In certain situations, you may also split income with a spouse or adult child if they work in the business.
5. Professional Image and Business Continuity
Incorporated businesses often appear more credible to clients, lenders, and investors.
Corporations don’t die when you do; they continue to exist and can be sold or passed on.
Disadvantages of Incorporating
While incorporation offers many benefits, it’s not for everyone. Here are some drawbacks:
1. Increased Costs and Paperwork
Incorporating can cost $200–$400 to register federally or provincially.
You’ll need to file a separate corporate tax return (T2) which comes at a price range of $250-2500 depending upon the complexity of the Tax Workout/s.
Bookkeeping, legal, and accounting costs tend to be higher.
2. Ongoing Compliance
Annual corporate filings with CRA and your province.
You must maintain proper records, minute books, and financial statements.
Annual Return of your corporation is mandatory to keep it compliant and preventing from dissolution.
3. No Immediate Tax Savings if You Spend Everything
If you’re taking all business income out for personal use, the tax deferral advantage disappears—you'll pay similar taxes to a sole proprietor, just with more complexity and cost.
4. Restrictions on CPP and EI
CPP is still payable on salary income, but not on dividends.
You may not qualify for Employment Insurance (EI) unless you pay into a special self-employed plan.
Case Study 2: Meet Priya – A Solo Consultant in Vancouver
Priya runs a solo consulting business earning $140,000/year. She has no employees, rents a small office, and bills corporations.
As a Sole Proprietor:
She pays over $40,000 in income tax annually.
She’s personally liable for any lawsuits or contractual disputes.
She can’t split income with her husband who helps with admin work.
As an Incorporated Business:
She could leave $40,000 in the corporation and pay only 12%–15% tax on it, deferring personal tax until she withdraws it later.
She could hire her husband, pay him a reasonable salary, and reduce taxable income.
Her risk exposure is reduced due to limited liability.
Signs You May Be Ready to Incorporate
✅ You’re earning more than $80,000/year consistently
✅ You want to retain some profits in the business
✅ You’re worried about liability or legal exposure
✅ You plan to sell the business in the future
✅ You want to split income with family members
✅ You’re applying for larger contracts or business loans
✅ You want a more professional business image
When It’s Better to Stay a Sole Proprietor
There are times when remaining a sole proprietor makes more sense, such as:
You're just starting out and earning under $50,000/year
You need every dollar you earn for living expenses
You don’t want to deal with the administrative burden
Your work has low legal risk (e.g., blogging, tutoring)
You’re testing a new business idea before going all-in
Case Study 3: Tanya – A New Entrepreneur
Tanya recently started a mobile makeup business. In her first year, she earned $28,000 and is still building her client base. She’s worried about liability but also trying to keep costs low.
Best Choice for Now?
Sole proprietorship.
She can consider getting liability insurance and incorporating later once income becomes consistent and higher.
The Hybrid Approach: Start as a Sole Proprietor, Then Incorporate
Many Canadian entrepreneurs start out as sole proprietors, then transition to incorporation once their income increases or they hit key milestones. This is a common and smart path.
💡 CRA allows you to transfer business assets tax-free to your new corporation using a Section 85 rollover, with the help of an accountant.
How to Incorporate in Canada (Brief Overview)
Choose a name or get a numbered company.
Register federally (with Corporations Canada) or provincially (e.g., Ontario Business Registry).
Open a corporate bank account.
Get a Business Number (BN) and register for GST/HST, payroll, WSIB if needed.
Work with an accountant or tax professional to stay compliant.
Conclusion: Incorporation vs. Sole Proprietorship—Which One’s Right for You?
There’s no one-size-fits-all answer. But here’s a general rule of thumb:
SituationRecommended OptionJust starting, earning <$50kSole ProprietorEarning consistently >$80kIncorporateConcerned about liabilityIncorporateNeed all income for livingSole ProprietorWant tax planning flexibilityIncorporatePlan to sell businessIncorporate
Incorporation is not just for big businesses. Even solo professionals and freelancers can benefit from it—if the timing and conditions are right.
Before making a move, speak with a tax professional or financial advisor who understands both your personal finances and long-term goals.
Final Thought
Incorporating can unlock a range of tax advantages, legal protections, and strategic options—but it also brings complexity and responsibility. Knowing when to take that step is crucial to your business and financial future.
Save thousands of dollars and years of trial and error.