Almost every Canadian business starts as one of two things: a sole proprietorship (you and the business are the same legal person) or a corporation (the business is its own legal person that you own through shares). The choice affects who is on the hook if something goes wrong, how your profit is taxed, how you pay yourself, and how much paperwork you file every year.

This guide walks through each difference with current 2026 figures from the CRA, Corporations Canada, and provincial registries. It is general information, not tax or legal advice: an accountant (and, for shareholder agreements or liability questions, a lawyer) should review your specific situation before you incorporate.

Sole proprietorship vs corporation: the short answer

A sole proprietorship is the default. If you start selling services or products on your own and do nothing else, you are a sole proprietor. It costs little or nothing to set up, your business profit goes on your personal tax return, and there is no separate corporate filing.

A corporation is a separate legal entity. It pays its own tax, files its own return, owns its own assets, and owes its own debts. You own it through shares and pay yourself from it by salary, dividends, or both. That separation is what gives you limited liability and the lower small business tax rate, and it is also what creates the extra cost and paperwork.

FeatureSole proprietorshipCorporation
Legal statusYou and the business are the same personSeparate legal person you own through shares
Liability for business debtsUnlimited: your personal assets are exposedGenerally limited to what shareholders invested
How profit is taxedAll profit on your personal return at your marginal rateCorporate rate first, then personal tax when paid out to you
Federal tax rate on business incomeYour personal marginal rate9% on the first $500,000 of active business income (CCPC)
Income tax returnT1 with Form T2125T2 every year, even with no tax payable
Setup cost (government fees)$0 under your own name; $60 to $70 to register a name in ON or BC$200 federal; $300 ON, $380 BC, $291.75 AB plus agent fee
Annual government filingName renewal every 5 years in OntarioAnnual return: $12 federal, $0 ON, $43.39 BC, $53.05 AB
Paying yourselfTake draws from the business accountSalary, dividends, or a mix
CPPBoth portions on self-employment earningsPaid on salary (both portions); none on dividends
Records to keepBusiness books and receiptsBooks plus minute book, share register, and ISC register
Sole proprietorship vs corporation in Canada. Government fees and rates checked September 2026.

Liability: what happens if the business owes money

As a sole proprietor, there is no legal wall between you and your business. If the business cannot pay a supplier, loses a lawsuit, or defaults on a loan, creditors can go after your personal assets, including savings and, in some cases, your home.

A corporation is a separate person in law. Corporations Canada puts it plainly: shareholders are not responsible for a corporation's debts, and if the corporation goes bankrupt, shareholders only lose what they invested. There are real limits to that protection, though:

  • Personal guarantees. Banks and landlords often ask small-business owners to personally guarantee corporate loans and leases. If you sign one, you are personally liable for that debt regardless of the corporation.
  • Directors' liability. Directors can be personally liable for some corporate obligations, such as unremitted payroll source deductions and GST/HST.
  • Your own negligence. Incorporating does not shield you from liability for your own professional mistakes. Business insurance matters under either structure.

So incorporation reduces risk from business debts and contracts, but it is not a complete shield. If liability is your main reason for incorporating, this is the part to discuss with a lawyer.

How taxes differ

Sole proprietorship: everything on your personal return

As a sole proprietor, you report business income on Form T2125, Statement of Business or Professional Activities, as part of your personal T1 return. Your net profit is added to any other income and taxed at your personal marginal rates, which rise as your income rises. Federal and provincial brackets both apply, and the top combined rates in every province are much higher than the corporate small business rate.

If you (or your spouse or common-law partner) have self-employment income, your return is due June 15, but any balance owing is still due April 30. Interest starts after April 30.

Corporation: two layers, with a lower rate on the first

A Canadian-controlled private corporation (CCPC) pays a reduced rate on active business income thanks to the small business deduction. The CRA lists the federal small business rate at 9%, compared with a general federal rate of 15%. The reduced rate applies to the first $500,000 of active business income per year (the business limit), which is shared among associated corporations.

Provinces add their own rate on top. Three examples from CRA and Alberta government figures:

  • Ontario: 3.2% lower rate, for a combined 12.2% on income under the business limit.
  • British Columbia: 2% lower rate, for a combined 11%.
  • Alberta: 2% small business rate, for a combined 11%.

That lower rate only applies to money that stays in the corporation. When the corporation pays you a salary or a dividend, you pay personal tax on it. Canada's tax system is designed so the total tax (corporate plus personal) on profit paid out to you ends up roughly similar to what you would pay earning it directly, a principle called integration. It is not exact, and the result varies by province and by year.

The practical upshot: incorporating mainly helps when you can leave profit in the corporation and pay it out later, which defers personal tax. It helps much less if you need every dollar of profit to cover your personal living costs.

Paying yourself: salary vs dividends

A sole proprietor does not pay themselves a salary. You simply move money from the business account to your personal account (a draw), and you are taxed on the business's net profit whether you withdraw it or not.

A corporation's money belongs to the corporation. To get it out, the two common methods are:

  • Salary. The corporation deducts your salary as an expense, runs payroll, withholds income tax and CPP, remits to the CRA, and issues you a T4. Salary creates RRSP contribution room and CPP pensionable earnings.
  • Dividends. Paid from after-tax corporate profit to shareholders, reported on a T5. No payroll is needed, and dividends are taxed at lower personal rates to account for the corporate tax already paid. Dividends do not create RRSP room or CPP contributions.

Many owner-managers use a mix, and the best mix depends on your province, your income needs, your retirement plans, and the year's rates. This is one of the most common reasons to hire an accountant once you incorporate.

For how salary and dividends work in practice, including payroll accounts, T4 and T5 slips, RRSP room, and shareholder loans, see our guide to paying yourself from a corporation.

CPP: what changes when you incorporate

CPP is often overlooked in this decision, and it cuts both ways.

As a sole proprietor, you pay both the employee and employer portions of CPP on your self-employment earnings. For 2026, the CRA lists a contribution rate of 5.95% each for employees and employers, a basic exemption of $3,500, maximum pensionable earnings of $74,600, and a maximum self-employed base contribution of $8,460.90. Second additional contributions (CPP2) also apply on earnings above the $74,600 threshold, up to a second ceiling.

In a corporation:

  • If you pay yourself a salary, the corporation pays the employer portion and withholds your employee portion. The combined total is the same as a sole proprietor would pay on the same earnings.
  • If you pay yourself only dividends, no CPP contributions are made, because the CRA does not treat dividends as pensionable earnings.

Paying only dividends lowers your contributions today, but it also lowers your future CPP retirement pension and can affect CPP disability benefits. It is a trade-off, not a free saving.

Costs and paperwork each year

Sole proprietorship

  • One personal tax return with Form T2125.
  • Business books and receipts (you must keep records for the CRA either way).
  • A separate business bank account is strongly recommended but not legally required.
  • If you registered a business name in Ontario, renew it every five years (the $60 renewal fee applies and the province does not send reminders).

Corporation

  • T2 corporation income tax return every year, even if there is no tax payable, due within six months of the end of the corporation's tax year. Most owners pay an accountant to prepare it.
  • Annual return to the jurisdiction you incorporated in: $12 online federally, $0 in Ontario, $43.39 in BC, and a $53.05 government fee in Alberta plus a registry agent service charge.
  • A separate corporate bank account. The corporation's money is not your money, and mixing the two causes tax and liability problems.
  • Corporate records (the minute book). Federally incorporated businesses must keep articles and by-laws, shareholder minutes and resolutions, filed notices of directors and registered office, a share register, and a register of individuals with significant control (ISC register). Corporations Canada notes these are usually kept in one binder called a minute book. Provincial corporations have similar requirements.
  • Payroll if you pay yourself a salary, including monthly or quarterly remittances and T4 slips.

Filing fees are small. The real ongoing cost of a corporation is professional fees for year-end accounting and the T2, plus your own time.

When does incorporating usually start to make sense?

There is no single income number where incorporation becomes the right answer, and we would be wary of anyone who gives you one without seeing your numbers. Instead, weigh these factors:

  1. Do you earn more than you spend? The main tax benefit comes from leaving profit in the corporation at the lower small business rate. If you need all your profit to live on, most of it will be paid out and taxed personally anyway, and the saving shrinks.
  2. Is your profit in the higher personal brackets? The gap between your personal marginal rate and the combined small business rate (around 11% to 12.2% in the examples above) is what makes deferral worthwhile. The bigger the gap on your retained profit, the bigger the potential deferral.
  3. How much liability risk does your business carry? Businesses with employees, leases, inventory, or significant contracts have more to protect. Remember that personal guarantees and professional liability are not solved by incorporating.
  4. Can you absorb the extra costs? Compare the likely tax deferral against annual accounting fees for a T2 and payroll, plus setup costs.
  5. Are you planning to sell, bring in partners, or raise money? A corporation has continuous existence and shares that can be issued or sold, which makes these easier.

GST/HST registration is a separate step

Choosing a business structure does not register you for GST/HST. That is a separate account with the CRA, required once your taxable revenue passes $30,000 over four consecutive calendar quarters (and optional before that). A corporation is a separate person, so if you incorporate, the corporation needs its own business number and its own GST/HST account. See our GST/HST registration guide for the steps, and GST/HST and PST rates by province for what to charge.

What about a partnership?

If two or more people run a business together without incorporating, they form a partnership. It works like a shared sole proprietorship: each partner reports their share of profit on their own personal return, and in a general partnership, each partner can be personally liable for the partnership's debts, including debts caused by another partner. Provinces generally require you to register a partnership, and a written partnership agreement drafted with a lawyer is strongly recommended.

How to register or incorporate

Registering a sole proprietorship

Under your own first and last name, you usually do not need to register at all in Ontario, Alberta, or Quebec (in Quebec, registration is voluntary in that case). If you use any other business name, register it provincially:

  • Ontario: $60 online through the Ontario Business Registry, valid five years.
  • British Columbia: $40 registration plus a $30 name approval, $70 total.
  • Alberta: $10.61 government fee to register a trade name through a registry agent, plus the agent's service charge.
  • Quebec: register with the Registraire des entreprises if your business name does not include your first and last name.

Incorporating yourself

  • Federally (Corporations Canada): $200 online, with the corporate name search now built into the online process for word names. Federal incorporation protects your name across Canada, but you still register extra-provincially in each province where you carry on business.
  • Ontario: $300 to file articles of incorporation online through the Ontario Business Registry.
  • British Columbia: $350 incorporation application plus a $30 name approval, $380 total, through BC Registries.
  • Alberta: $291.75 government fee through a registry agent, plus the agent's service charge. You need an Alberta NUANS name search report first.

Filing the articles is the easy part. You also need by-laws, an initial directors' resolution, share issuance, and your registers set up, which is where many first-time owners use a lawyer or a service.

Using an incorporation service

Online services handle the forms, organizational documents, and minute book for you. Ownr is currently operating and publishes its pricing. As of September 2026, for an Ontario owner incorporating federally, its pricing page lists:

  • Online Minute Book Plan: $499 upfront, including one-time government and filing fees, then $199 a year.
  • Managed Corporation Plan: $998 upfront, including government and filing fees, then $599 a year. Adds documents like dividend resolutions, GST/HST registration, and director and address changes.
  • Sole proprietorship registration: $49 one-time, with government fees covered.

Prices vary by province and jurisdiction, and the page does not show a currency code (Ownr serves Canadian businesses). Promotion: Ownr advertises a discount of up to $300 on incorporation plans (and $49 on sole proprietorship registration) if you open a new RBC business bank account.

See Ownr's current pricing (opens NorthVetted redirect)

If you are in Ontario, our step-by-step guide to registering a business in Ontario covers the Ontario Business Registry, business name renewals, WSIB, and Employer Health Tax.

The bottom line

Start as a sole proprietor if you are testing an idea, your profit is modest, you need most of it to live on, and your liability risk is low. It is cheap, simple, and you can incorporate later.

Look seriously at incorporating when you are consistently earning more than you need to live on, your business carries real liability risk, or you plan to bring in partners or sell. Weigh the deferral against the extra accounting cost and the CPP trade-off, and talk to an accountant who can run your actual numbers before you file.

Frequently asked questions

Is a sole proprietorship or a corporation better in Canada?

Neither is better for everyone. A sole proprietorship is cheaper and simpler to run, while a corporation limits your personal liability for business debts and can lower the tax you pay on profits you leave in the business. The right choice depends on your profit, your risk, and whether you need all of your income to live on.

How much does it cost to incorporate in Canada?

Federal incorporation through Corporations Canada costs $200 online, plus $12 a year for the online annual return. Provincial incorporation costs $300 online in Ontario, $380 in British Columbia (including the $30 name approval), and a $291.75 government fee in Alberta plus a registry agent service charge. Accounting fees for the yearly T2 return usually cost more than the filing fees.

Do I need to register a sole proprietorship?

In Ontario, Alberta, and Quebec, you generally only need to register if you operate under a name other than your own first and last name. British Columbia charges $40 plus a $30 name approval to register a sole proprietorship. A business number from the CRA is a separate step.

What is the small business tax rate in Canada?

The federal rate for a Canadian-controlled private corporation is 9% on the first $500,000 of active business income. Provinces add their own rate: 3.2% in Ontario and 2% in British Columbia and Alberta, for combined rates of 12.2%, 11%, and 11%.

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

Yes, and many owners do. Moving existing business assets into a new corporation has tax consequences, and a tax-deferred transfer is possible under the Income Tax Act, so this is a step to plan with an accountant.

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