What each one is
A sole proprietorship is you, doing business under your own name or a registered business name. There is no separate legal entity: the income is yours, the debts are yours and the contracts are yours. A partnership is the same idea with two or more owners.
A corporation is a separate legal person. It owns the business, signs the contracts, carries the debts and files its own tax return. You own shares in it and may also be its director and employee.
Liability
In a sole proprietorship, a lawsuit or an unpaid business debt can reach your personal assets. In a corporation, liability is generally limited to what the corporation owns, with exceptions for personal guarantees (which banks and landlords often ask for), director liabilities such as unpaid payroll remittances and GST/HST, and personal negligence. For any business with employees, premises, vehicles, food or physical work, this is usually the deciding factor.
Tax
A sole proprietor reports business income on the T1 personal return (form T2125) and pays tax at personal marginal rates, which rise with income. A Canadian-controlled private corporation pays the small business rate on the first $500,000 of active business income, roughly 9% to 12% combined federal and provincial depending on the province, and then you are taxed personally only on what you take out as salary or dividends. That deferral is valuable when the business earns more than you need to live on; it is worth little if you withdraw everything.
Corporations also carry costs: a separate T2 return, financial statements, payroll if you pay yourself a salary, and an annual return with the registry.
Cost, paperwork and perception
| Sole proprietorship | Corporation | |
|---|---|---|
| Set-up | Business name registration, under $100 in most provinces | Incorporation $200 to $450 in government fees plus name search; service fee for documents and accounts |
| Yearly upkeep | Renew the name every few years; T1 with T2125 | Annual return, T2 return, financial statements, minute book |
| Name protection | Weak; others can use similar names | Protected in the province (or across Canada if federal) |
| Credibility | Fine for freelancers and trades | Expected by many corporate clients, landlords, lenders and immigration programs |
| Bringing in partners or investors | Hard; requires a partnership agreement | Issue shares |
| Closing down | Cancel the registration | Dissolution filings and final returns |
When to incorporate
- You earn more than you need personally and want to leave profit in the business at the small business rate.
- The business carries real liability: staff, premises, vehicles, food, construction, anything that can hurt someone.
- Clients, a landlord, a franchisor or a lender require a corporation.
- An immigration program (PNP entrepreneur streams, Start-up Visa, C11, ICT) is built around a company you own.
- You plan to bring in a partner or investor, or to sell the business one day (the lifetime capital gains exemption applies to qualifying shares).
- If none of these apply yet, a sole proprietorship is a reasonable way to test the idea, and you can incorporate later and roll the business into the corporation.