If you’re an entrepreneur with a great idea for a business venture, you’ll eventually need to decide whether or not to incorporate. Sole proprietorships and corporations are two common business structures used by small business owners in Canada. To choose the right business structure, you should understand the financial and legal implications of both.

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Sole Proprietorship

With a sole proprietorship, the individual businessperson and the business itself are legally and financially the same entity. The main benefits are that set-up and registration are generally faster and cheaper than incorporating. The biggest drawbacks are that the individual is fully liable for all debts and legal issues faced by the business, and they pay personal income tax, which is usually at a higher rate than corporate tax.

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Corporation

With a corporation, the business is considered a separate legal person from the owner. The main benefits are limited liability, in that legal and financial responsibilities lie with the corporation and not the individual, and the corporation is usually taxed at a lower rate. It can also be easier to transfer ownership of the business and to raise capital from investors.

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We generally recommend that a business owner incorporate instead of operating as a sole proprietorship.

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