If your business is growing, you have probably asked yourself whether it is time to incorporate. It is one of the biggest calls a business owner makes, and the honest answer is that it depends on your numbers and your plans. Let us walk through both options in plain terms, with a real dollar example, so you can see where you fit.
What a Sole Proprietorship Is
A sole proprietorship is the simplest way to run a business. There is no legal line between you and the business. You report all of your business income on your personal T1 return, and you are personally responsible for any debts the business takes on. Getting started is easy and cheap: you register a business name with the Ontario government for under $100, and you are off.
What Incorporation Is
When you incorporate, you create a separate legal entity. The corporation earns income, pays its own tax, and holds its own assets, apart from you. You own it through shares, and it files its own corporate return, called a T2, every year. That separation is the root of almost every difference that follows.
The Tax Difference, Which Is the Big One
As a sole proprietor, all of your profit is taxed at your personal rate. In Ontario for 2026, that climbs as high as 53.53% at the top end. A corporation is taxed very differently. A Canadian-controlled private corporation pays just 12.2% on its first $500,000 of active business income, made up of 9% federal and 3.2% Ontario tax.
That rate is about to get even lower. In its 2026 budget, Ontario is cutting the small business rate from 3.2% to 2.2% on July 1, 2026, which brings the combined rate down to 11.2%. For a business at the $500,000 mark, that is up to $5,000 in yearly savings.
Here is the important part, though. That low rate only helps on money you leave inside the company. Incorporation is a tax deferral, not a free tax cut. The moment you pay yourself, personal tax applies as usual. So the real benefit shows up when your business earns more than you need to live on and you can reinvest the rest.
What the Difference Looks Like in Dollars
Numbers make this clearer. Picture a business that nets $120,000 in a year, and an owner who only needs $70,000 of it to live on. As a sole proprietor, all $120,000 is taxed at personal rates that year, whether you spend it or not.
Incorporated, you could pay yourself the $70,000 and leave the other $50,000 in the company. That $50,000 is taxed at the small business rate of 12.2%, so about $6,100, instead of your personal rate of roughly 43% on that slice, which would be about $21,500. That leaves around $15,000 more working inside the business until you need it. The catch, again, is that when you eventually take that money out, personal tax applies then. So this is about timing and smoothing your income, not escaping tax altogether. Still, that breathing room can be a real advantage for a growing business.
How You Pay Yourself from a Corporation
Once you incorporate, your pay does not just land in your account; you choose how to take it. There are two main ways, and most owners use a mix. A salary is a deductible expense for the company, and it builds RRSP room and CPP for you. Dividends are simpler to pay and are taxed a little more gently in your hands, but they do not build CPP or RRSP room. Which mix is right depends on your goals, so this is one of the first things worth planning with an accountant after you incorporate.
Protecting What Is Yours
Incorporation also puts a wall between your business and your personal assets. If the corporation runs into debt or a legal claim, your home and savings generally sit on the other side of that wall. As a sole proprietor, there is no wall, and you are personally on the hook. The protection is not absolute, but for many owners it is a real reason to incorporate.
What Incorporation Costs
Setting up a corporation is not free, and neither is keeping it running. Here is a realistic picture.
- Setup: about $300 to incorporate provincially in Ontario, or $200 federally, if you do it yourself. With a lawyer for a more complex setup, budget $1,000 to $2,500
- Yearly corporate return (T2): roughly $1,500 to $3,000 when prepared by an accountant
- Bookkeeping: often $200 to $500 a month, depending on how busy your books are
- All in: most small corporations spend around $3,000 to $6,000 a year on accounting and filing
When Incorporating Usually Makes Sense
Incorporation tends to pay off once your net business income sits consistently above roughly $75,000 to $80,000, because that is where the tax savings start to outweigh the extra costs. It is also worth it if you want liability protection, plan to reinvest profits, want to bring in partners, or hope to sell one day. One more perk: the lifetime capital gains exemption, now $1.25 million in 2026, only applies when you sell qualifying shares of a corporation, not a sole proprietorship.
When Staying a Sole Proprietor Makes Sense
If your business is young, your income is modest, or you spend most of what you earn, staying a sole proprietor is often the smarter move. You keep things simple, your costs stay low, and you avoid paperwork you do not yet need. You can always incorporate later as you grow, so there is no rush to lock yourself into the extra admin before the numbers justify it.
Side by Side
| Sole Proprietorship | Incorporation | |
| Setup cost | Under $100 | $300 to $2,500 |
| Yearly cost | Low | About $3,000 to $6,000 |
| Tax on profit | Your personal rate, up to 53.53% | 12.2% on the first $500,000 (11.2% from July 2026) |
| Liability | You are personally responsible | Personal assets are largely protected |
| Paperwork | Simple | More, including a yearly T2 return |
| Best for | Newer or smaller businesses | Growing businesses earning above what you need to live on |
The Bottom Line
There is no single right answer here. It comes down to how much you earn, how much you reinvest, and where you want your business to go. The best way to decide is to run your actual numbers with an accountant who can show you the difference in dollars. If you are weighing it up, we can help you register a company or file your corporate return once you do.
