Sole proprietorship
vs. incorporation.

By Jonathan Kleiman, Barrister & Solicitor · Updated June 2026

The fundamental difference

Every business in Ontario operates under some legal structure. The two most common for entrepreneurs starting out are the sole proprietorship and the corporation. Understanding the difference between them — and the practical implications of that difference — is one of the most important early decisions you will make as a business owner.

A sole proprietorship is an unincorporated business run by one person. Legally, the business is you. There is no separation between your personal identity and the business. You report the business income on your personal tax return, you are personally liable for every debt and obligation of the business, and if the business is sued, it is you who is being sued. The sole proprietorship is not a separate entity — it is simply a label for what you are doing.

A corporation is a separate legal entity created by filing articles of incorporation with the government. Once incorporated, the corporation is a "legal person" — it can own property, enter contracts, sue and be sued, hire employees, borrow money, and incur liabilities, all in its own name. You, as the shareholder, own the corporation — but you are not the corporation. This distinction is the foundation of everything that follows.

Every practical difference between a sole proprietorship and a corporation — liability protection, tax treatment, cost, compliance requirements, access to capital, ability to sell the business — flows from this single fundamental distinction: is the business a separate legal entity, or is it just you doing business under a name?

Liability protection

Sole proprietorship: unlimited personal liability

As a sole proprietor in Ontario, you are personally liable for every obligation of the business. This is unlimited liability — there is no cap, no shield, and no separation between your business assets and your personal assets. If the business owes money it cannot pay, creditors can pursue your personal bank accounts, your investments, your vehicles, and your home (subject to certain exemptions under Ontario's Execution Act, which provides limited protection for a principal residence up to $10,000 in equity — a threshold that has not been updated since 2002 and provides almost no practical protection for homeowners with equity).

Here are the scenarios where unlimited personal liability becomes dangerous:

• Customer lawsuits. If a customer is injured by your product or service, or alleges that your work was negligent, they can sue you personally. A slip-and-fall in your store, a defective product that causes injury, an error in professional advice that causes financial loss — all of these can result in judgments against you personally, not just against a business entity.
• Contract disputes. If you enter a contract in the business's name and cannot perform (or the other side claims you breached), the resulting judgment is against you personally. A supplier you owe $50,000, a customer claiming $100,000 in damages from a failed project, a landlord claiming rent for the balance of a commercial lease — these are all personal debts.
• Unpaid trade debts. If the business fails and owes money to suppliers, lenders, or landlords, those creditors can pursue you personally for the full amount.
• Employee claims. If you fail to pay wages, vacation pay, or statutory entitlements, or if an employee sues for wrongful dismissal, the liability is yours personally.
• Regulatory fines and penalties. Fines for health and safety violations, environmental contamination, or other regulatory breaches are assessed against you personally as the business operator.

Insurance helps — commercial general liability (CGL) insurance and professional liability (errors and omissions) insurance can cover many of these risks. But insurance has limits, exclusions, and deductibles. It does not cover intentional conduct, many contract disputes, or regulatory penalties. And policies can be voided if you fail to disclose material information or breach a policy condition. Insurance is a complement to corporate limited liability, not a substitute for it.

Corporation: limited liability

A corporation provides limited liability to its shareholders. Because the corporation is a separate legal entity, it is the corporation — not the shareholders — that is responsible for its own debts and obligations. If the corporation is sued and a judgment is entered against it, creditors generally cannot pursue the shareholders' personal assets. The most you can lose, as a shareholder, is the amount you invested in the corporation (the money you paid for your shares).

This is the single most important practical benefit of incorporation for Ontario business owners. It creates a legal firewall between the business's liabilities and your personal wealth. If the business fails, if a massive judgment is entered, if a contract goes catastrophically wrong — your home, your savings, your personal investments, and your other assets are generally protected.

Important exceptions to limited liability:

Limited liability is not absolute. There are several situations where shareholders, directors, or officers of an Ontario corporation can be held personally liable:

• Personal guarantees. If you personally guarantee a corporate debt (as lenders and landlords often require from small business owners), you have voluntarily waived limited liability for that obligation. The guarantee creates a personal obligation that exists alongside the corporate one. Wherever possible, negotiate to avoid or limit personal guarantees.
• Director liability for statutory obligations. Under both the Ontario Business Corporations Act (OBCA) and the Canada Business Corporations Act (CBCA), directors can be personally liable for up to six months of unpaid employee wages, for unremitted source deductions (income tax, CPP, and EI withheld from employees but not remitted to the CRA), for unpaid HST remittances, and for certain environmental contamination. These are statutory obligations that the corporate veil does not protect against.
• Piercing the corporate veil. In exceptional cases, courts can "pierce the corporate veil" — setting aside the separate legal personality of the corporation and holding shareholders personally liable. This typically requires fraud, use of the corporation as a sham or alter ego to avoid existing obligations, or complete disregard for corporate formalities (commingling personal and corporate funds, failing to maintain corporate records, using the corporate account as a personal bank account). Veil-piercing is rare in Ontario, but it does happen when the facts justify it.
• Personal tortious conduct. If you personally commit a tort (a wrongful act causing harm) — even while acting in your corporate capacity — you can be personally liable for that tort alongside the corporation. Directing employees to engage in fraudulent conduct, personally assaulting someone, or personally making defamatory statements creates personal liability regardless of corporate structure.

Maintaining the corporate veil: To preserve limited liability protection, you must maintain the corporation as a genuinely separate entity. This means keeping corporate finances separate from personal finances (separate bank accounts, no personal expenses paid by the corporation without proper documentation), maintaining proper corporate records (minutes of meetings, annual resolutions, a current minute book), holding the corporation out as a separate entity in all dealings (using the corporate name in contracts, on invoices, on signage), and complying with statutory filing requirements (annual returns, financial statements).

Tax implications

Sole proprietorship: personal tax rates

As a sole proprietor, all business income is reported on your personal tax return (Form T2125 — Statement of Business or Professional Activities, filed with your T1 personal return). The business income is combined with your other personal income (employment income, investment income, rental income, etc.) and taxed at your marginal personal tax rate.

In Ontario, the combined federal-provincial marginal tax rates for 2026 are approximately:

• First ~$57,000 of taxable income: approximately 20%
• $57,000 to $115,000: approximately 29-31%
• $115,000 to $155,000: approximately 33-36%
• $155,000 to $221,000: approximately 41-46%
• $221,000 to $250,000: approximately 49%
• Over $250,000: approximately 53.53%

(These are approximate combined rates. Exact rates depend on the specific federal and Ontario brackets in effect and any applicable surtaxes or credits.)

Advantages of sole proprietorship taxation:

• Loss deduction. Business losses from a sole proprietorship can be deducted against your other personal income — including employment income. If you earn $80,000 from a day job and your new business loses $20,000 in its first year, the loss reduces your taxable personal income to $60,000. This is particularly valuable in the startup phase when losses are common. Corporate losses, by contrast, can only be carried forward and applied against future corporate income — they cannot reduce your personal tax bill.
• Simplicity. No separate corporate tax return to file (the T2 corporate return is a complex document that typically requires an accountant). No requirement to pay yourself a salary or dividends — you simply draw from the business account as needed.
• No double taxation concern. With a corporation, income is taxed twice — once at the corporate level and again when distributed to you as salary or dividends. As a sole proprietor, income is taxed only once, at your personal rate.

Disadvantages of sole proprietorship taxation:

• High marginal rates on higher income. If your business generates more income than you need to live on, you cannot leave the excess in a lower-tax environment. Every dollar of business profit is taxed at your personal marginal rate, which can reach 53.53% in Ontario.
• No income splitting opportunities. You cannot pay a salary to family members (unless they actually perform services for the business at fair market value), and you cannot distribute income through dividends on multiple share classes.
• No access to the Lifetime Capital Gains Exemption (LCGE). When you sell a sole proprietorship, you are selling business assets — not shares. The $1.25 million LCGE on qualified small business corporation shares is not available. This is one of the most significant long-term tax disadvantages of operating as a sole proprietor.

Corporation: the small business tax rate

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 per year. This is the most significant tax advantage of incorporation.

The difference between a 12.2% corporate rate and a 53.53% personal marginal rate is enormous. On $200,000 of business income, the tax difference is approximately $82,000 per year — money that stays in the corporation to be reinvested, used as working capital, or saved for future needs.

However — and this is critical to understand — the tax advantage only exists if you leave money in the corporation. If you withdraw all corporate income as salary, the salary is deductible to the corporation (reducing corporate tax to zero on that amount) but fully taxable to you at your personal rate. If you withdraw it as dividends, the corporation pays tax at the corporate rate, and you then pay personal tax on the dividend (at a reduced rate due to the dividend tax credit) — but the combined corporate + personal tax on dividends is designed to be roughly equivalent to what you would have paid on the same income as a sole proprietor. This is called "integration" — the tax system is designed so that, over the long term, the total tax on income earned through a corporation and distributed to the shareholder is approximately the same as the tax on the same income earned directly.

The real advantage of incorporation is tax deferral: the ability to leave money in the corporation, taxed at only 12.2%, rather than withdrawing it and paying 30-53% personally. This deferred tax allows the corporation to reinvest, grow, and compound returns on the pre-personal-tax amount. It is meaningful when:

• Your business generates more income than you need to live on personally
• You want to build reserves for future investment, expansion, or contingencies
• You want to invest surplus business income inside the corporation (though passive investment income inside a CCPC has its own complex tax rules)
• You want to smooth your personal income over time — drawing less in high-income years and more in low-income years

Additional corporate tax advantages:

• Lifetime Capital Gains Exemption (LCGE). When you sell shares of a qualified small business corporation (QSBC), up to $1.25 million (as of 2025) of capital gains per individual shareholder is exempt from tax. For a business with two shareholder-spouses, that is $2.5 million in tax-free capital gains on the sale of the business. This is only available for shares of a corporation — sole proprietors cannot access it.
• Income splitting (limited). While the Tax on Split Income (TOSI) rules enacted in 2018 significantly restricted income splitting with family members, some opportunities remain — particularly for family members who are actively involved in the business and for shareholders over age 24. Proper planning with an accountant is essential.
• Estate planning. Corporate structures can facilitate estate planning through estate freezes, family trusts, and the ability to pass the business to the next generation in a tax-efficient manner.
• Year-end flexibility. A corporation can choose any fiscal year-end, allowing for some flexibility in tax planning. A sole proprietorship must use December 31 as its fiscal year-end.

When incorporation does NOT save tax:

• When you need to withdraw all corporate income for personal living expenses — integration ensures the total tax burden is approximately the same
• When the business generates less than approximately $50,000-$60,000 in net income — the administrative costs of maintaining a corporation (accountant fees, annual filings) may exceed the tax deferral benefit
• When the business is generating losses — sole proprietorship losses can offset personal income; corporate losses cannot

Cost and administrative complexity

Sole proprietorship: minimal cost, minimal paperwork

A sole proprietorship is the simplest and cheapest way to start a business in Ontario:

• Registration: If you operate under your own legal name, no registration is required. If you use a different business name (a "trade name"), you must register the sole proprietorship through the Ontario Business Registry — approximately $60 for a five-year registration. Registration is done online and takes minutes.
• Ongoing compliance: Minimal. File your personal tax return (T1) including the business income statement (T2125). Renew your business name registration every five years ($60). Comply with any industry-specific licensing requirements.
• Accounting costs: Lower than a corporation. Many sole proprietors with simple businesses can prepare their own tax returns (though an accountant is always advisable as income grows). No requirement for financial statements or separate corporate tax returns.
• Banking: You can operate from your personal bank account (though a separate business account is strongly recommended for recordkeeping). No requirement for corporate banking documentation, resolutions, or signing authorities.
• Dissolution: Simply stop operating. Cancel the business name registration if you have one. File your final tax return including any remaining business income or expenses. There is no formal dissolution process.

Corporation: higher cost, ongoing obligations

A corporation involves significantly more cost and administrative overhead:

• Incorporation fees: Ontario provincial incorporation — approximately $300 in government fees. Federal incorporation (CBCA) — approximately $200 online. NUANS name search report (required to confirm name availability) — approximately $20-$50.
• Legal fees for incorporation: $1,000 to $2,500 for a standard incorporation package including articles of incorporation, bylaws, organizational resolutions, first directors' resolutions, share certificates, registers and ledgers, and the corporate minute book. More complex structures (multiple share classes, shareholder agreements, holding companies) cost more. (For a full breakdown of what these legal services run, see our guide on business lawyer costs in Toronto.)
• Ongoing annual costs:
  • Corporate tax return (T2) preparation by an accountant: $1,000 to $3,000+ per year depending on complexity
  • Annual return filing with the Ontario Business Registry: $20 to $40 per year
  • Corporate minute book maintenance (annual resolutions, directors' declarations): included in some annual accounting packages, or $300-$500 per year if done separately by a lawyer
  • HST filings (quarterly or annually): may require accountant involvement
  • Payroll: if you pay yourself a salary, you must run payroll, remit source deductions, and file T4s — either through a payroll service ($20-$100/month) or your accountant
• Corporate governance requirements: The corporation must maintain a registered office in Ontario, maintain a corporate minute book (minutes of shareholder and director meetings, or written resolutions in lieu of meetings), file annual returns, maintain financial records for at least six years, and comply with the Ontario Transparency Register requirements (a register of individuals with significant control over the corporation). These ongoing obligations after you incorporate are easy to overlook in the first year.
• Dissolution: Winding up a corporation is a formal process requiring shareholder approval, settlement of debts, distribution of remaining assets, filing articles of dissolution, obtaining a certificate of dissolution, and filing a final corporate tax return. It is significantly more involved (and more expensive) than simply closing a sole proprietorship.

As a rough estimate, the annual "overhead" of maintaining a corporation (accountant fees for the corporate return, annual filings, basic minute book maintenance) is typically $2,000 to $5,000 per year more than what a sole proprietor would pay for their personal tax return with a business schedule. This is the ongoing cost of the corporate structure — the price you pay for limited liability and tax deferral benefits.

Access to capital and business credibility

Sole proprietorship

Raising capital as a sole proprietor is limited. You cannot issue shares or bring in equity investors — the business is you, and there is no mechanism for others to own a piece of it (other than becoming a partnership, which is a different structure). You can borrow money, but lenders are lending to you personally — there is no corporate credit history, no corporate assets to secure against (everything is your personal asset), and no distinction between a personal loan and a business loan from the lender's perspective.

Many suppliers, commercial landlords, and larger clients also prefer to deal with incorporated businesses. A corporation conveys permanence, professionalism, and financial stability — rightly or wrongly, a numbered Ontario corporation is often perceived as more established than "John Smith, sole proprietor." Government procurement contracts and many private-sector RFPs require bidders to be incorporated.

Corporation

A corporation can raise capital by issuing shares to investors — giving them an ownership stake in exchange for their investment. This is the fundamental mechanism by which businesses grow beyond the founder's personal resources. Angel investors, venture capital firms, and strategic partners all invest by purchasing shares of a corporation.

A corporation can also build its own credit history, borrow in its own name (though personal guarantees may still be required for small or new corporations), lease equipment, and enter into financing arrangements that are not available to unincorporated businesses.

If you ever want to bring in partners or investors, or if you want the flexibility to sell part of the business without selling all of it, incorporation is a prerequisite.

Ability to sell the business

Sole proprietorship: asset sale only

When you sell a sole proprietorship, you are selling individual business assets — equipment, inventory, customer lists, goodwill, intellectual property, and contract assignments. Each asset is sold separately for tax purposes, and the tax treatment depends on the type of asset (depreciable property, eligible capital property, inventory, etc.). There is no single "sale of a business" — it is multiple transactions happening simultaneously.

Critically, the Lifetime Capital Gains Exemption (LCGE) is not available on the sale of sole proprietorship assets. The LCGE only applies to capital gains realized on the disposition of qualified small business corporation shares. This means that a sole proprietor selling a business worth $1 million in goodwill pays full capital gains tax on that amount — while a shareholder selling shares of the same business for $1 million might pay zero tax (up to the $1.25 million LCGE limit).

Corporation: share sale or asset sale

When selling an incorporated business, you have two options: sell the shares of the corporation (a "share sale") or have the corporation sell its individual assets (an "asset sale"). Each has different tax implications for the buyer and seller:

• Share sale: You (the shareholder) sell your shares to the buyer. The gain is a capital gain, of which 50% is included in income (the "inclusion rate"). If the shares qualify as qualified small business corporation (QSBC) shares, the first $1.25 million of capital gains per individual is exempt from tax under the LCGE. For a married couple who both own shares, that is $2.5 million tax-free. This is an enormous tax advantage that is only available through a corporate structure.
• Asset sale: The corporation sells its individual assets to the buyer. The corporation pays tax on any gains, and then the proceeds must be distributed to the shareholder(s) — either as dividends or on wind-up — triggering a second level of tax. Asset sales are generally preferred by buyers (who get a stepped-up cost base for the assets) and share sales are generally preferred by sellers (who get the LCGE). Negotiations on deal structure are a significant part of any business sale transaction.

If there is any possibility that you will sell your business someday — and most business owners aspire to an eventual exit — incorporation provides significantly better tax outcomes on the sale.

Registration process in Ontario

Registering a sole proprietorship

Registering a sole proprietorship in Ontario is straightforward:

1. Choose a business name (optional — you can operate under your own legal name without registration). The name cannot be the same as or confusingly similar to an existing business name or trademark.
2. Register online through the Ontario Business Registry (ServiceOntario). The registration costs approximately $60 and takes effect immediately.
3. Obtain an HST number (required if annual revenue exceeds $30,000) through the CRA.
4. Open a business bank account (strongly recommended but not legally required).
5. Obtain any required municipal licenses or permits.

The entire process can be completed in a single day. The registration is valid for five years and must be renewed.

Incorporating in Ontario

Incorporation is more involved. The process depends on whether you incorporate provincially (under the Ontario Business Corporations Act) or federally (under the Canada Business Corporations Act):

Ontario provincial incorporation:

1. NUANS search. A NUANS (Newly Upgraded Automated Name Search) report checks whether your proposed corporate name conflicts with existing business names and trademarks in Ontario. The search is required for named corporations (not required if incorporating as a numbered company). Cost: $20-$50.
2. Prepare articles of incorporation. This is the constitutional document of the corporation. It specifies the corporate name, the registered office address, the share structure (classes of shares and the rights attached to each), any restrictions on business activity or share transfers, and the names of the first directors.
3. File with ServiceOntario. Articles are filed online or by mail through the Ontario Business Registry. Government filing fee: approximately $300. Processing time: same day for online filing.
4. Prepare organizational documents. After filing, an incorporation lawyer prepares the corporate minute book: general bylaws, organizational resolutions (appointing officers, establishing fiscal year-end, authorizing banking), first directors' resolutions, share certificates, and the registers and ledgers required by the OBCA.
5. Obtain a Business Number and HST registration from the CRA.
6. Open a corporate bank account.
7. Set up the corporate Transparency Register (required since January 1, 2023 — a private register of individuals with significant control over the corporation, maintained at the registered office).

Federal (CBCA) incorporation: The process is similar, but filing is with Corporations Canada (Industry Canada) rather than ServiceOntario. Government filing fee: approximately $200 for online filing. A federal corporation must also extra-provincially register in Ontario (approximately $80) to carry on business in the province. Federal incorporation provides automatic name protection across all of Canada — not just Ontario.

For a comparison of Ontario vs. federal incorporation in more detail, see our guide on federal vs. Ontario incorporation.

When to stay as a sole proprietor

A sole proprietorship is often the right choice when:

• You are testing a business idea and want to start a business quickly with minimal cost. If the idea does not work, you have invested $60 in a name registration rather than $1,500-$3,000 in incorporation costs.
• The business generates modest income — under approximately $50,000-$60,000 in annual net profit. At this level, the tax deferral benefit of incorporation may not exceed the additional annual costs of maintaining a corporation.
• The business carries low liability risk. Freelance writing, tutoring, virtual consulting, graphic design from home — activities where the risk of a large judgment or significant unpaid debt is minimal. (Even "low-risk" businesses can face unexpected claims, so this assessment should be honest.)
• You have no employees and no significant contracts. The liability exposure from employees (wrongful dismissal claims, workplace injuries) and from significant commercial contracts (breach of contract, indemnity obligations) is what makes limited liability protection valuable. Without these, the risk profile may not justify the cost of incorporation.
• You expect losses in the early years and want to deduct those losses against your other personal income (such as employment income from a day job). This is a legitimate reason to start as a sole proprietor and incorporate once the business is profitable.
• You operate a side business alongside full-time employment and the business is genuinely part-time, small-scale, and low-risk.

When to incorporate

Incorporation makes sense when any of the following conditions are met:

• Annual net income exceeds approximately $50,000-$60,000. At this level, the small business tax rate (12.2%) versus your personal marginal rate (likely 30%+) creates a meaningful deferral advantage — assuming you do not need to withdraw all the income for personal expenses.
• You face meaningful liability risk. Any business that enters significant contracts, serves customers on-site, sells physical products, provides professional advice, operates a physical location, or employs staff has liability exposure that justifies the corporate shield. A single lawsuit can exceed everything you own.
• You have partners or investors. A corporation with a shareholders' agreement provides the structural framework for shared ownership — share classes reflecting different contributions, governance rules, transfer restrictions, and exit mechanisms. A sole proprietorship cannot accommodate multiple owners (you would need a partnership, which has its own complexities and lacks limited liability).
• You want to build business credit separately from personal credit. The corporation can establish its own credit history, borrow in its own name, and build a financial track record that is independent of your personal finances.
• You plan to sell the business someday. Access to the Lifetime Capital Gains Exemption ($1.25 million per shareholder, tax-free on the sale of QSBC shares) is available only to shareholders of a corporation. If the business has any significant goodwill value, the tax savings on an eventual sale can be enormous.
• You want to retain earnings in the business. If the business generates more income than you need personally, leaving the excess in a corporation taxed at 12.2% (rather than drawing it out and paying 30-53% personally) allows faster growth and compounding.
• You need professional credibility. Many larger clients, government contracts, and commercial partners require incorporation. An incorporated business may also be perceived as more established and permanent.
• You want to do estate planning. Corporate structures facilitate estate planning tools (estate freezes, family trusts, multiple share classes) that are not available to sole proprietors.

Transitioning from sole proprietorship to corporation

Many Ontario entrepreneurs start as sole proprietors and incorporate later when the business grows. This is a perfectly valid approach — start simple, incorporate when the numbers and risk profile justify it.

The transition process involves:

1. Incorporate the new corporation (following the incorporation process described above).
2. Transfer assets from the sole proprietorship to the corporation. This includes equipment, inventory, intellectual property, contracts, customer relationships, and goodwill. The transfer must be documented with a written asset transfer agreement.
3. File a Section 85 rollover with the CRA. Section 85 of the Income Tax Act allows you to transfer assets from a sole proprietorship to a corporation on a tax-deferred basis — meaning you do not trigger capital gains or recapture on the transfer. Both you and the corporation must jointly elect to use section 85, and the election must be filed within specific deadlines. This is a technical tax filing that requires an accountant.
4. Assign or novate contracts. Existing contracts with customers, suppliers, and landlords need to be assigned to the corporation (with the other party's consent) or new contracts entered in the corporation's name. Leases typically require landlord consent for assignment.
5. Update registrations and accounts. HST number, business bank accounts, insurance policies, licenses, permits, domain names, and any other registrations need to be transferred to the corporation or new ones obtained in the corporate name.
6. Cancel the sole proprietorship business name registration.
7. Notify stakeholders. Customers, suppliers, lenders, insurers, and government agencies should be notified of the change in business entity.

The transition should be managed by both a lawyer (for the incorporation, corporate organization, asset transfer agreement, and contract assignments) and an accountant (for the Section 85 rollover election and tax planning). Done properly, the transition can be accomplished with minimal tax cost and business disruption. Done improperly, it can trigger unnecessary tax liabilities and create gaps in contract coverage or insurance protection.

Timing considerations: The best time to incorporate is typically at the beginning of a calendar year or fiscal period — it simplifies the tax returns (one return for the sole proprietorship period, one for the corporate period) and avoids mid-year complications. Talk to your accountant about optimal timing before proceeding.

Other business structures in Ontario

While sole proprietorship and incorporation are the most common structures, Ontario also offers:

• General partnership: Two or more people carrying on business together with a view to profit. Like a sole proprietorship, partners have unlimited personal liability — and each partner is jointly and severally liable for the obligations of the partnership (meaning one partner can be on the hook for 100% of a partnership debt). A written partnership agreement is essential but does not provide limited liability.
• Limited partnership (LP): A partnership with one or more "general partners" (who manage the business and have unlimited liability) and one or more "limited partners" (who invest passively and have limited liability, as long as they do not participate in management). LPs are governed by Ontario's Limited Partnerships Act.
• Limited liability partnership (LLP): Available only to regulated professionals (lawyers, accountants, and certain other professional groups). Partners are not personally liable for the negligence of other partners — only for their own. Governed by the Partnerships Act.
• Co-operative: A democratic organization owned and operated by its members. Governed by the Ontario Co-operative Corporations Act or the Canada Cooperatives Act.

For most Ontario entrepreneurs choosing between operating alone and forming a standard business entity, the real decision comes down to sole proprietorship vs. corporation. The other structures address specific situations (multiple owners without incorporation, professional practices, member-owned organizations) and are less commonly chosen by first-time business owners.

Frequently asked questions

What is the difference between a sole proprietorship and a corporation in Ontario?

A sole proprietorship is you and the business — no legal separation. You report business income on your personal tax return and are personally liable for all business debts. A corporation is a separate legal entity that owns its own assets, incurs its own liabilities, and files its own tax return. The corporation provides limited liability protection; the sole proprietorship does not.

How much does it cost to incorporate in Ontario?

Government filing fees: approximately $300 for Ontario provincial incorporation or $200 for federal incorporation. Legal fees for the full incorporation package (articles, bylaws, resolutions, minute book): typically $1,000 to $2,500. Total: approximately $1,300 to $2,800 for a standard single-owner incorporation. A sole proprietorship business name registration costs approximately $60.

When should I incorporate my business?

Consider incorporating when your business generates more than approximately $50,000-$60,000 in annual net income (making the small business tax rate advantage meaningful), when you face significant liability risk, when you have or want partners or investors, or when you want to access the Lifetime Capital Gains Exemption on a future sale of the business.

Can I switch from a sole proprietorship to a corporation later?

Yes. Many business owners start as sole proprietors and incorporate later. The transition involves incorporating the new entity, transferring assets and contracts, and filing a Section 85 rollover with the CRA to defer tax on the transfer. A lawyer and accountant should manage this transition to ensure it is done properly and tax-efficiently.

Do I need a lawyer to incorporate in Ontario?

It is possible to file articles of incorporation yourself online. However, a lawyer ensures the share structure is appropriate for your situation, that the bylaws and organizational documents are properly drafted, that the minute book is complete, and that potential issues (share restrictions, director residency requirements, multi-class structures for tax planning) are addressed from the outset. If you have partners, investors, or any complexity, legal advice is strongly recommended.

What is the small business tax rate in Ontario?

Approximately 12.2% combined federal-provincial tax on the first $500,000 of active business income earned by a Canadian-controlled private corporation (CCPC). This compares to personal marginal rates of up to 53.53% in Ontario.

Can a sole proprietorship have employees?

Yes. A sole proprietor can hire employees. However, having employees increases your liability exposure significantly (employment standards obligations, workplace safety, wrongful dismissal claims) and adds administrative complexity (payroll, source deductions, T4 filings, WSIB). If you have employees, incorporation is more strongly recommended for the liability protection it provides.

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 — and that time comes sooner than most Ontario entrepreneurs think.

Questions about sole proprietorship vs. incorporation in Ontario?

Feel free to contact Jonathan Kleiman, a business lawyer based in Toronto, Ontario.

Call 416-554-1639 or book a free 30-minute consultation.