Sole Proprietorship vs. Corporation: Which One Is Right for You?
- Clear Path Ledger
- Sep 7
- 4 min read
Choosing how to structure your business is one of the most important decisions you’ll make and it can have major implications on your taxes, liability, growth, and exit strategy. For most entrepreneurs, it comes down to two common options: sole proprietorship or incorporation.
Here’s a breakdown of the pros, cons, and when each structure makes sense for you with real-world context to help guide your decision.
What Is a Sole Proprietorship?
A sole proprietorship is the simplest business structure. It’s unincorporated, owned by one person, and legally inseparable from the owner.
Advantages:
An extremely easy and inexpensive structure to setup – Check your provincial requirements to see if you need to register at all. While most do need to register with your provinces, get a business number and possibly apply for permits / licenses. Per CRA, some sole proprietorships (operating under the name of operator) do not need to register at all. Please confirm with your provincial requirements for more details.
You can use your personal T1 Tax return for reporting income. Simply complete form T2125 – Statement of Business or Professional Activities.
HST/GST – if you are expecting annual revenues above $30,000, you will need to obtain an HST/GST number and remit returns.
Operating losses can offset other personal income, such as wages, investment income, etc.
Operating income is taxed at your personal marginal tax rate.
Drawbacks
You are personally liable for all debts and legal obligations of the business and in some extreme cases, personal assets could be used to settle those debts and legal obligations.
Limited access to capital. Raising funds can be harder and you’ll likely need to sign a personal guarantee.
Fewer business deductions (compared to corporations).
What Is a Corporation?
A corporation is a separate legal entity. It files its own tax return (T2), can enter contracts, own assets, and carry its own debts. Owners are shareholders.
Advantages:
Limited liability. Your personal assets are generally protected from debts and legal obligations.
Lower corporate tax rates on the first $500,000 of active income (provincially dependent – between 12 and 15%).
Ability to split your personal income through salaries/dividends and lower your personal tax burden.
Tax deferral: leave profits in the corporation and re-invest in the business vs withdrawing the amounts and paying higher tax rates.
Easier to sell or transfer the business during sale.
Drawbacks:
Higher administrative costs associated with completing corporate disclosures, tax filings, resolutions, returns and corporate meeting minutes.
Losses can't be used to offset personal income.
Sole Proprietorship vs Corporation Comparison Table
A quick side-by-side comparison of key differences:
Factor | Sole Proprietorship | Corporation |
Legal Status | Not a separate legal entity, the owner is the business. | Separate legal entity distinct from its owners (shareholders). |
Liability | Unlimited personal liability, owner is personally responsible for debts and obligations. | Limited liability – shareholders’ liability usually limited to their investment. |
Taxation | Income taxed as personal income at individual marginal rates. | Income taxed at corporate tax rates (often lower than personal rates); possible integration of dividends/salaries to shareholders. |
Complexity & Cost | Easy and inexpensive to set up and maintain. | More complex and costly to incorporate, with ongoing filings and compliance. |
Continuity | Business ends if the owner dies, retires, or exits. | Continuous existence regardless of ownership changes. |
Financing | Limited financing options; mainly personal funds, loans. | Easier to raise capital through issuing shares, attracting investors, or corporate financing. |
Regulatory Requirements | Minimal reporting and compliance (business license, taxes). | Ongoing corporate filings, annual returns, financial statements, corporate records. |
Privacy | Owner’s name often public, but little formal disclosure required. | Corporate information (directors, filings) publicly available through registries. |
Profits | All profits belong directly to the owner. | Profits belong to the corporation; distributed as salaries, bonuses, or dividends. |
Best For | Small, low-risk businesses with one owner. | Businesses seeking growth, investors, liability protection, or tax planning opportunities. |
When Each Structure Makes Sense
Sole Proprietor
Freelance Graphic Designer or Writer
Operates from home with minimal expenses.
No employees or significant assets at risk.
A corporation would add unnecessary administrative costs (annual filings, separate tax returns) without much benefit.
Handyman or Small Repair Business
Low initial investment (basic tools and equipment).
Limited scope of work, often part-time.
Easier to start quickly and scale later if needed.
Home-Based Consultant (e.g., Bookkeeping, Marketing, IT Support)
Operates solo with a laptop and phone.
Clients are typically other small businesses.
No investors or complex financing needed, so incorporation provides little extra benefit at the start.
Corporation
Landscaping Business with Employees
High liability exposure (accidents, property damage, contracts).
Incorporation shields the owner’s personal assets.
Hiring staff and bidding on larger projects often requires being incorporated for credibility.
Tech Startup or Software Company
Can issue shares to founders, employees, or investors (fundraising).
Incorporation makes ownership clear.
Creates tax planning opportunities.
Retail Store or Franchise
Has employees, inventory, and lease obligations.
Incorporation provides protection if the business cannot meet obligations.
Corporate structure helps with succession planning if the store is sold or passed down.
Final Thoughts
There’s no one-size-fits-all answer, but here’s a simple guideline:
Start as a sole proprietor if you're testing an idea or earning less than $60,000 per year.
Incorporate when your business becomes profitable, involves risk, requires outside investment, or you're planning for the long term.
If you would like to know a bit more, we help small business owners choose and implement the right structure from day one, or when it’s time to level up. If you already own a business and need help creating systems, customized reporting and deeper knowledge over your financials and taxes, please send us a message. We’re here to help.
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