The two most common business structures for Ontario entrepreneurs. Here is how they compare on liability, taxes, cost, and complexity — and when it makes sense to incorporate.
By Jonathan Kleiman, Barrister & Solicitor · Published May 2026
A sole proprietorship is an unincorporated business run by one person. There is no legal separation between you and the business. You report the business income on your personal tax return, and you are personally liable for everything the business does.
A corporation is a separate legal entity. It owns assets, enters contracts, and incurs liabilities in its own name. The corporation files its own tax return, and as a shareholder, your personal liability is generally limited to the amount you invested.
Every other difference — taxes, creditor protection, formalities, cost — flows from this fundamental distinction.
As a sole proprietor, you are personally liable for all business debts and obligations. If the business is sued, your personal assets — your home, savings, vehicles — are at risk. If a customer slips and falls, if a supplier sues for unpaid invoices, or if a contract goes wrong, creditors can pursue you personally. If you are operating or planning to register a sole proprietorship, consider getting sole proprietorship legal services to understand your exposure.
A corporation provides limited liability. The corporation is responsible for its own debts, and creditors generally cannot pursue the shareholders' personal assets. There are exceptions — directors can be personally liable for unpaid wages, source deductions, and certain environmental obligations — but the general rule is that the corporate structure shields personal assets.
Note: limited liability protection can be lost if you personally guarantee a loan, commingle personal and corporate funds, or use the corporation to commit fraud. Maintaining proper corporate records (minutes, resolutions, and the corporate minute book) is essential to preserving the liability shield.
All business income is reported on your personal tax return and taxed at your marginal personal tax rate. In Ontario, the combined federal-provincial marginal rate ranges from approximately 20% to 53.53% depending on your total income.
The advantage: business losses can be deducted against your other personal income (such as employment income), which can be helpful in the early years of a business.
Active business income earned by a Canadian-controlled private corporation (CCPC) is taxed at the small business tax rate — approximately 12.2% combined federal-provincial in Ontario on the first $500,000 of active business income.
The difference between a 12.2% corporate rate and a 53.53% personal rate is significant. Money left in the corporation is taxed at the lower rate, allowing you to reinvest, build reserves, or defer personal tax until you pay yourself a salary or dividends.
However, incorporating purely for tax purposes only makes sense when the business generates more income than you need to live on. If you withdraw all the corporate income as salary or dividends, the combined corporate and personal tax is roughly equivalent to what you would pay as a sole proprietor. The tax advantage comes from the ability to leave money inside the corporation.
Consult an accountant for tax planning advice specific to your situation. A business lawyer handles the legal side of incorporation; your accountant handles the tax strategy.
The additional cost and paperwork of a corporation is the trade-off for liability protection and tax advantages. For businesses with minimal revenue or risk, the overhead may not be justified. For businesses with significant income, employees, or liability exposure, the investment pays for itself.
Free 30-minute consultation with a Toronto business lawyer.
A sole proprietorship is often the right choice when:
Incorporation makes sense when:
Yes. Many Ontario entrepreneurs start as sole proprietors and incorporate later when the business grows. The transition involves:
The transition should be managed by both a lawyer and an accountant to ensure the rollover is properly structured and no tax is triggered unnecessarily.
Start simple, incorporate when the numbers make sense. The right time to incorporate is when the liability protection and tax savings justify the additional cost and formality.
A sole proprietorship is you and the business — no legal separation. A corporation is a separate legal entity that owns assets, incurs liabilities, and files its own tax return. The corporation provides limited liability protection; the sole proprietorship does not.
Ontario provincial incorporation filing fees are approximately $300. Federal incorporation costs approximately $200 online. Legal fees for the full incorporation package (articles, bylaws, resolutions, minute book) typically range from $1,000 to $2,500. A sole proprietorship registration costs approximately $60.
Consider incorporating when your business generates significant revenue ($50,000+ annually), when you face liability risks, when you have partners or investors, or when you want to take advantage of the small business tax rate.
Yes. Many business owners start as sole proprietors and incorporate later. The process involves incorporating the new entity, transferring assets and contracts, and potentially filing a Section 85 rollover. A lawyer and accountant should manage this transition.
A lawyer ensures the share structure, bylaws, and organizational documents are properly set up. If you have partners, investors, or any complexity, legal advice is strongly recommended. Jonathan Kleiman offers flat-fee Ontario incorporations.
Not sure whether to operate as a sole proprietor or incorporate? Jonathan Kleiman advises Toronto entrepreneurs on business structure every day. A 30-minute consultation gives you a clear answer based on your specific situation.
Call 416-554-1639 or book a free consultation.
A 30-minute consultation with a Toronto business lawyer gives you a clear answer. Sole proprietorship, incorporation, or partnership — Jonathan will tell you what fits.