Choosing how to set up your business is one of the first big decisions you will make. In Ontario, most small business owners choose between a sole proprietorship and a corporation. Neither is right for everyone. Here is a simple comparison to help you think it through.
Sole proprietorship: you and the business are one
A sole proprietorship is the simplest way to start. You and the business are legally the same person.
You report your business income on your personal (T1) tax return. You are personally responsible for the business, which means your personal property and savings can be at risk if something goes wrong.
If you use a business name other than your own name, you register it in Ontario, and the registration must be renewed every five years.
Corporation: a separate legal person
A corporation is a separate legal person from you. It has its own bank account, its own Business Number, and files its own corporate (T2) tax return every year, even if it owes no tax.
Your personal liability is generally limited, and a corporation may qualify for lower tax rates on business income. In return, it costs more to set up and needs more paperwork, including a yearly annual return to the government (for Ontario corporations, within six months of each year-end) and proper corporate records.
Side by side
| Sole proprietorship | Corporation |
| Legal status | Same as the owner | Separate legal person |
| Personal liability | Owner is personally liable | Generally limited |
| Tax return | Owner’s personal return (T1) | Corporate return (T2) every year |
| Tax rates | Owner’s personal rates | May qualify for lower rates |
| Set-up cost | Lower | Higher |
| Ongoing paperwork | Lighter; renew business name every 5 years | More; yearly annual return and corporate records |
Questions to ask yourself
How much profit do you expect, and will you leave some of it in the business? Does your work carry risks that could lead to claims against you?
Do your clients or contracts require you to be incorporated? Do you plan to bring in partners or investors?
Are you ready for the extra cost and paperwork of a corporation?
Two common myths
“Incorporating always saves tax.” Not always. The benefit depends on how much profit you make and how much you leave in the company instead of paying it out to yourself.
“A corporation protects me from everything.” Not quite. Limited liability helps, but banks often ask owners to personally guarantee business loans, and directors can be personally responsible for some unpaid amounts, such as payroll deductions and GST/HST the company did not send to the CRA.
Paying yourself
As a sole proprietor, the profit is simply your income. With a corporation, you usually pay yourself a salary, dividends or a mix of both. Each option has different tax, payroll and paperwork rules, so it is worth planning before your first year-end.
Can you start one way and change later?
Yes. Many owners start as a sole proprietor and incorporate once the business grows. When you incorporate, the corporation becomes a new legal person, and the CRA registers a new Business Number for it. Planning the switch ahead of time makes it much smoother.
How North Vista can help
We can talk through your plans, explain the tax and paperwork for each option, and then register your business name or incorporate your company in Ontario or federally, and set up your CRA accounts.
