Should I Incorporate or Stay a Sole Proprietor in Canada?

If you’re running a business in Canada, one of the biggest questions you’ll face is: Should I stay a sole proprietor or incorporate? This decision can impact everything from your taxes and liability to your long-term growth potential.

Here’s a 2025 guide to help you decide what’s best for your business.

What’s the Difference Between Sole Proprietorship and Incorporation?

• Sole Proprietorship: You’re the business. Any income you earn is reported on your personal tax return, and you’re personally responsible for all debts and liabilities.
• Incorporation: You create a separate legal entity. The corporation files its own taxes, and your personal liability is generally limited.

When Does It Make Sense to Stay a Sole Proprietor?

Staying a sole proprietor might make sense if:

• You’re just starting out or testing a business idea
• Your revenue is under $60,000/year
• You want to keep things simple and avoid extra paperwork
• You’re okay being personally liable for debts

It offers lower startup costs and less red tape, but comes with fewer tax advantages.

When Should You Incorporate?

Incorporation might be right for you if:

• Your business is earning $70,000+ in profit
• You want to limit your personal liability
• You plan to reinvest profits into the business
• You’re hiring employees or taking on investors
• You’re concerned about credibility and brand protection

Major Benefits of Incorporating in Canada

• Tax Deferral: Corporate tax rates are generally lower than personal rates. You can defer personal tax by leaving income in the corporation.
• Limited Liability: You’re not personally liable for most business debts.
• Income Splitting: You may be able to pay family members or issue dividends.
• Lifetime Capital Gains Exemption: If you sell shares of a qualifying Canadian business, up to $1 million in gains can be tax-free.
• Better Access to Capital: Investors and lenders often prefer incorporated businesses.

Downsides of Incorporating

• More paperwork and annual filings
• Separate corporate tax returns (T2)
• Possible double taxation if you withdraw profits inefficiently
• Higher upfront legal and accounting costs

Real Example: $100K Profit Scenario

• Sole Proprietor: You pay full personal tax on $100K. If you’re in Ontario, that could be around $26,000 to $30,000 in tax.
• Corporation: Pay 12.2% small business tax ($12,200), and only pay personal tax on what you withdraw. You can leave the rest in the corporation for future investment.

Which Is Better for You?

Ask yourself:

• Am I keeping most of the profits or reinvesting them?
• Is my business growing fast?
• Do I need legal protection from liability?
• Am I ready for the paperwork and compliance?

Pro Tip: You can always start as a sole proprietor and incorporate later. Just make sure to keep detailed records so the transition is clean.

Let NRK Accounting Help You Decide

At NRK Accounting, we work with new and growing business owners across Canada. We can walk you through:

• Incorporation setup (with the right structure)
• Tax strategy and legal compliance
• Optimizing your income between salary and dividends

Book a free consultation today and let’s build the right foundation for your business.