Should I incorporate or stay a sole proprietor?
Written by For Founders Law, a Toronto firm licensed by the Law Society of Ontario. About us
Short answer
Incorporate if you plan to raise money, give anyone equity, sign significant contracts or take on real liability, because a corporation is a separate legal person that can issue shares and generally shields your personal assets from its debts. A sole proprietorship is simpler and cheaper for testing an idea alone. The tax answer depends on how much you earn and how much you leave in the business, so ask an accountant.
What’s the legal difference?
A sole proprietorship isn’t a separate entity. It’s you, doing business, possibly under a registered business name. The business’s contracts, debts and lawsuits are yours personally.
A corporation is a separate legal person. It signs its own contracts, owns its own IP and owes its own debts. Shareholders generally aren’t liable for the corporation’s obligations beyond what they invested, under section 45 of the CBCA and the equivalent rule in Ontario’s Business Corporations Act.
| Sole proprietorship | Corporation | |
|---|---|---|
| Separate legal person | No | Yes |
| Personal liability for business debts | Yes | Generally no, with exceptions |
| Can issue shares or options | No | Yes |
| Can take SAFEs or equity investment | No | Yes |
| Tax | Business income on your personal return | Corporation files its own T2 |
| Ontario setup cost | $60 business name registration, if you use a name | $300 Ontario filing fee, plus setup |
Government fees are from Ontario’s fees page and can change.
When is it time to incorporate?
Common triggers for tech, wellness and creative founders:
- Someone else is involved. A cofounder, an early employee who wants equity, or an advisor. Only a corporation can issue them shares or options. See how should cofounders split equity?
- Investors. Angels and funds invest in corporations, usually by SAFE or shares. See how SAFEs work in Canada.
- Liability. You’re signing customer contracts, leasing space, treating clients, or the product could cause losses if it fails.
- IP. You want the product owned by an entity you can sell or raise money on, not by you personally.
- Income. Your profit is more than you need to live on, and keeping some in a corporation may defer tax. That’s an accounting question.
Does a corporation fully protect me?
Not completely. You’re still liable for your own wrongdoing, anything you personally guarantee (banks and landlords often ask), and some statutory debts of the corporation if you’re a director, such as certain unpaid wages and tax remittances. See are directors personally liable for company debts? Regulated health professionals also have their own rules about practising through a corporation.
What about tax?
A Canadian-controlled private corporation can pay a lower rate on its first $500,000 of active business income through the small business deduction in section 125 of the Income Tax Act. Whether that helps depends on how much you take out, since money paid to you is taxed again personally. Ask an accountant to compare your numbers. See what is a CCPC?
Can I move my sole proprietorship into a corporation later?
Yes. The usual route is to transfer the business assets, including IP, to the new corporation. A tax-deferred transfer under section 85 of the Income Tax Act needs an accountant. Also sign a written IP assignment, so the code or content you made before incorporating clearly belongs to the company. See who owns code a contractor writes?
What does incorporating cost?
$300 for an Ontario filing, or $200 federally. Our incorporation fee starts at $600, including share issuance and a minute book. See how much does it cost to incorporate in Ontario?
This guide is general information about Ontario and Canadian law, not legal or tax advice for your situation. To talk through whether it’s time, book a free 15-minute consult.