Sole Proprietorship v.s. Corporation
- Author: Marc Laatu
- Date: May 26, 2025
Introduction
When starting a business in Ontario, one of the most important decisions you’ll make is choosing the right business legal structure. The two most common options for a business legal structure are a sole proprietorship and a corporation. Each comes with distinct costs, benefits, and responsibilities — and the choice can have significant legal, tax, and operational implications. This article outlines the key costs and benefits of both business legal structures to help Ontario entrepreneurs make an informed decision.
Overview of Each Business Legal Structure
Sole Proprietorship
A sole proprietorship is the simplest business legal structure. You, the owner, are the business. There is no legal distinction between personal and business assets or liabilities.
Corporation
A corporation is a separate legal entity. It can enter contracts, incur debt, own property, and be sued independently of its shareholders.
Startup and Ongoing Costs
|
|
Sole Proprietorship |
Corporation |
|
Registration Fee |
~$60 (NUANS name search optional) |
$300 (Ontario Business Registry) + NUANS ($60) |
|
Legal/Professional Setup |
Often none or minimal |
$500–$2,000+ for legal/accounting setup |
|
Annual Filings |
None, unless registered business name expires |
Must file annual corporate return, file separate tax return and maintain the corporate records |
|
Accounting Fees |
~$300–$800/year (basic) |
$1,000–$3,000+/year (due to complexity) |
|
Total First-Year Cost |
Low (~$100–$500) |
Moderate to High (~$1,000–$3,500+) |
Takeaway: Sole proprietorships are a much cheaper business legal structure to set up and maintain than a corporation.
Legal Liability
|
|
Sole Proprietorship |
Corporation |
|
Owner liability |
Unlimited personal liability |
Limited personal liability (protection from most business debts) |
|
Personal versus Business assets |
No distinction between personal and business assts, all at risk (e.g., equipment, home, car) |
Only corporate assets usually at risk |
Takeaway: Corporations offer stronger protection from legal and financial risks for the operation of the business than sole proprietorships.
Tax Considerations
|
|
Sole Proprietorship |
Corporation |
|
What income taxed |
No distinction between business income and personal income (i.e. all taxed the same) |
Business income taxed separately from personal income at corporate tax rate |
|
Applicable tax rate |
Marginal tax rates up to ~53.5% (depending on income) |
Small business income tax rate is 12.2% in Ontario for 2025 and the general corporate income tax rate is 26.5% |
|
Tax filing |
Simple tax filing (T1 + T2125) |
More complex (T2 Corporate Return) |
|
Retention of earnings |
Cannot retain earnings in the business |
Can retain earnings and reinvest at lower tax rates, with the potential for tax deferral and/or income splitting |
Takeaway: Corporations offer more tax planning opportunities, especially at higher income levels.
Succession and Continuity
|
|
Sole Proprietorship |
Corporation |
|
Lifecycle |
Business ends when the owner dies or retires |
Continues beyond the life of the owner |
|
Sale |
Harder to sell or transfer because business assets & income mixed with personal assets |
Easier to sell shares or transfer ownership |
Takeaway: Corporations are a better business legal structure for long-term growth and succession.
Best For Whom?
|
Sole Proprietorship |
Corporation |
|
Freelancers, solo professionals, consultants with low risk |
Tech startups, growing businesses, or anyone needing liability protection |
|
Individuals making under ~$60,000/year |
Businesses making $80,000+ or looking to reinvest profits |
|
Owners looking for simple setup and flexibility |
Owners seeking tax advantages, scalability, or outside funding |
Final Thoughts
There’s no universal answer — the right business legal structure depends on your business size, income level, risk exposure, and long-term goals. A sole proprietorship may be preferrable if you’re just starting, want to keep costs low, and have minimal legal risk. Structuring your business as a corporation may be preferrable if you’re earning more, need liability protection, or want to reinvest profits and grow your business in a tax-efficient way. Before making a decision on your business legal structure, it’s wise to consult with a lawyer or accountant familiar with Ontario business law and taxation.
If you need help or would like more information on structuring your business, get in touch with our experienced team of business lawyers at CARREL+Partners LLP today.
Disclaimer:
This publication is for general information purposes and is not to be taken as legal advice. The information within is current only to the date of publishing. If you have any questions regarding article content, please contact the author(s) directly.