Should you stay a sole proprietor or incorporate? It's one of the most common questions we get from Ontario business owners. The right answer depends on your profit, your risk, and your plans. Here's how the two structures compare, updated for Ontario's July 2026 small business tax cut.
Sole proprietorship
A sole proprietorship is the default when you start doing business on your own. You and the business are the same person for tax and legal purposes.
How it's taxed: you report business income on Form T2125 with your personal return, and it's taxed at your personal rates. You pay both the employee and employer portions of CPP on your net self-employment earnings.
Pros:
- Simple and cheap to set up and run
- Business losses can offset your other income, like employment income
- Less paperwork and lower accounting costs
Cons:
- Unlimited personal liability for business debts and claims
- All profit is taxed personally in the year it's earned, even if you leave it in the business
- In Ontario, you generally need to register your business name if you operate under a name other than your own legal name
Corporation
A corporation is a separate legal person. It owns the business, earns the income, and files its own T2 tax return.
How it's taxed: a Canadian-controlled private corporation (CCPC) pays a reduced rate on its first $500,000 of active business income through the small business deduction. Federally that rate is 9%. Ontario cut its small business rate from 3.2% to 2.2% on July 1, 2026, so the combined rate is now 11.2% for a full year. Income above the limit is taxed at the general rate. You then pay personal tax when you take money out as salary or dividends.
Pros:
- Limited liability, although lenders often ask owners for personal guarantees
- Tax deferral: profit you leave in the company is taxed at the low corporate rate until you take it out
- Flexibility in how you pay yourself (salary, dividends, or a mix)
- Lifetime Capital Gains Exemption: if you sell qualifying small business shares, you may be able to shelter up to $1.275 million of the gain (2026 figure)
Cons:
- Higher setup and annual costs, including a separate T2 return and financial statements
- More admin: a minute book, annual filings, payroll or dividend slips
- Business losses stay in the corporation and can't offset your personal income
- The rules on paying family members dividends (the tax on split income) are strict
When incorporating usually makes sense
- You consistently earn more profit than you need to live on, so you can leave money in the company
- Your business carries real liability risk
- You plan to sell the business one day and want access to the LCGE
- You're bringing in partners or investors
When it's usually better to wait
- You're just starting out and expect losses, which are more useful against your personal income
- Your profit is modest and you need all of it to live on
- You don't want the extra admin yet
There's no magic income number. The decision comes down to how much profit you'd leave in the company, your liability exposure, and your long-term plans.
A note on the Ontario rate change
Along with the corporate rate cut, Ontario is reducing its dividend tax credit for small business (non-eligible) dividends on January 1, 2027. Leaving profit in the corporation is now a bit more attractive, while taking it out as dividends costs slightly more personally. Our post on Ontario's 2026 Budget explains the trade-off.
Sources
- Corporation tax rates, Canada Revenue Agency
- 2026 Ontario Budget, Annex: Details of Tax Measures (small business rate cut), Government of Ontario
- T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income, Canada Revenue Agency
- Ontario Business Registry, Government of Ontario
Thinking about incorporating? Read our guide to incorporating in Ontario or book a consultation and we'll run the numbers for your situation.