Start · Structure

Sole proprietorship vs. corporation in Canada (2026)

A sole proprietorship is the cheapest, simplest way to legally do business in Canada. It’s also unlimited liability and tax-inefficient once you cross roughly $80,000–$100,000 in net business income. Here’s how to decide.

Updated June 2026.

The short answer

• Stay a sole proprietor if you’re testing an idea, earning under ~$50,000/year, and your work doesn’t create meaningful liability risk.
• Incorporate if you have employees, take on customer or product liability, want to retain earnings inside the company, or earn enough to benefit from the small business deduction.

What a sole proprietorship actually is

A sole proprietorship is just you, doing business under your own name or a registered trade name. It is not a separate legal entity. The business’s income is your income, reported on the T2125 form attached to your personal T1 return. The business’s debts are your debts.

You can operate under your own legal name (“Sarah Tran”) with no registration at all in most provinces. If you want a trade name (“Sarah Tran Photography”), you register a business name with your province - typically $60–$80 and 15 minutes online.

What a corporation actually is

A corporation is a separate legal person. It has its own bank account, files its own T2 tax return, and - critically - its debts are its own, not yours. You become a shareholder, an employee, and usually a director.

Setting one up costs $200–$500 in government fees plus $0–$1,500 if you use a service. Maintaining it costs $300–$2,000/year in accounting and filings.

Liability: the real reason most people incorporate

If a customer sues your sole proprietorship and wins, they can come after your house, your car, and your savings. If they sue your corporation, they can take what’s in the corporation - not your personal assets (with some exceptions for director liability around payroll source deductions, GST/HST, and environmental harm).

Software with no users, a freelance writer, a tutor working with adults - the liability is small enough that a sole prop is fine. A renovation contractor, a daycare, a food business, a SaaS handling customer data - incorporate before you sign your first contract.

Taxes: when incorporation starts paying

Sole proprietors pay personal income tax on every dollar of net business income, at marginal rates that hit ~30% around $55,000 and ~43% around $111,000 (federal + average province, 2026).

A Canadian-Controlled Private Corporation (CCPC) pays a combined federal + provincial small business tax rate of roughly 9–12% on the first $500,000 of active business income. The catch: you only personally benefit from that low rate on dollars you leave inside the corporation. Dollars you pay out as salary or dividends get taxed again personally.

The win is real when you don’t need to spend everything you earn - you retain capital at the corporate rate, defer personal tax, and pay yourself a smoothed amount over time.

Realistic break-even

Pure tax math says incorporating starts to pay around $80,000–$100,000 in net business income, assuming you can leave a meaningful portion inside the company. Below that, the savings rarely cover the extra $1,000–$2,000/year in accounting and filing costs.

If you’re incorporating purely for tax reasons and you live paycheque-to-paycheque from the business, you’re probably not going to come out ahead. Incorporating for liability is a different decision - that can be worth it at any revenue level.

Other reasons to incorporate

• Name protection. Federal incorporation reserves your name nationwide. A provincial registered business name is only protected within that province.
• Continuity. The corporation survives the death or departure of any one shareholder.
• Selling the business. Selling shares of a CCPC can qualify for the Lifetime Capital Gains Exemption (over $1 million in 2026, indexed).
• Hiring co-founders. Splitting equity cleanly requires shares.
• Some clients require it. Enterprise customers and government often won’t contract with sole proprietors.

How to register a sole proprietorship

1. Decide on a name. Use your own legal name for free, or pick a trade name.
2. Register the trade name with your province (Service Ontario, Registraire des entreprises du Québec, BC Registry, ServiceAlberta). $60–$80, valid for 3–5 years.
3. Get a CRA business number only if you need one - you do once you register for GST/HST, payroll, or import/export. Otherwise your SIN is fine.
4. Register for GST/HST when your trailing 12-month revenue crosses $30,000. Earlier is optional and often worth it. Full guide.
5. Open a business bank account. Not legally required, but CRA expects clean separation between business and personal money.

Moving from sole prop to corporation later

You can incorporate at any time. A section 85 rollover lets you transfer your sole proprietorship’s assets into the corporation without triggering capital gains. It’s the kind of thing you do with an accountant - the form (T2057) is fiddly and the math depends on what you’re transferring (goodwill, equipment, inventory).

FAQ

Do I need a business license to be a sole proprietor?

Generally no - registration of a trade name with the province isn’t the same as a license. You may still need municipal business licenses or sector-specific permits (food handling, contracting, professional regulation).

Can a sole proprietor have employees?

Yes. You register a CRA payroll account and remit source deductions like any employer. You can’t hire yourself as an employee - sole proprietors don’t draw a salary.

How does GST/HST work for sole props?

Same rules as corporations. You must register once you cross $30,000 in 12-month revenue. See the guide.

Next steps

• Still deciding? Our blog breaks down sole proprietorship vs corporation in Canada with a practical framework for choosing.
• Leaning toward incorporation? Read how to incorporate federally or your provincial guide: Ontario, Quebec, BC, Alberta.
• Staying a sole prop? Read how to register for GST/HST and our accounting software comparison.

Last updated: June 4, 2026. We review this page when rules or pricing change. Spot an error?