This is one of the most common questions small business owners in Ontario ask: should I incorporate or stay a sole proprietor? The answer depends on how much you earn, how much you spend personally, and how much risk your business carries.

Sole proprietorship: what it is

A sole proprietorship is the simplest business structure. You and the business are the same legal entity. You report all business income on your personal tax return (Form T2125). There is no separate legal entity, no corporate tax return, and no annual corporate filings.

You can register a business name in Ontario for about $60, and you are open for business.

Corporation: what it is

A corporation is a separate legal entity. It files its own tax return (T2), has its own bank accounts, and can own assets and enter contracts in its own name. Incorporating in Ontario costs approximately $1,500 to $3,000 in legal fees, plus ongoing annual costs.

Tax comparison

As a sole proprietor, all net business income is taxed on your personal return at your marginal rate. In Ontario, the combined federal-provincial rate starts at about 20% and climbs to over 53% on income above roughly $235,000.

A corporation pays approximately 12.2% (combined federal-provincial) on the first $500,000 of active business income (the small business rate). You then pay additional tax when you take money out as salary or dividends.

The benefit of incorporation shows up when you earn more than you need to spend personally. If your business earns $300,000 but you only need $150,000 to live on, the remaining $150,000 stays in the corporation and is taxed at 12.2% instead of your personal rate of roughly 43-48%.

If you spend everything you earn, incorporation does not save you tax.

Rough break-even point

Incorporation usually starts making sense when your net business income is consistently above $150,000 to $200,000 and you can leave at least $50,000 to $75,000 in the corporation each year. Below that, the compliance costs eat into the deferral benefit.

Liability

A corporation provides limited liability. If the business is sued or cannot pay its debts, your personal assets are generally protected. As a sole proprietor, your personal assets are at risk.

However, limited liability has exceptions. Banks often require personal guarantees on business loans. Directors can be personally liable for unpaid wages, HST, and source deductions.

Other considerations

  • CPP: sole proprietors pay both the employee and employer portions. Through dividends, you avoid CPP entirely, but you also do not build CPP contribution room.
  • RRSP room: salary creates RRSP room. Dividends do not.
  • Credibility: some clients prefer to work with incorporated businesses.
  • Succession and sale: a corporation is easier to sell or transfer. The lifetime capital gains exemption (~$1 million for qualifying small business shares) is available only to corporations.

The bottom line

Do not incorporate just because someone told you it saves taxes. Run the numbers with a CPA first. The right answer depends on your specific income, spending, and business situation.

L&R Accounting helps Ontario business owners decide whether incorporation makes sense and handles the tax planning on both sides. Reach out if you want a comparison based on your actual numbers.

Geetha Srinivasan, CPA (Ontario), CPA (US)
L&R Accounting Services Ltd.