Sole Proprietorship vs Corporation in Ontario: Which Is Better in 2026?

Prepared by Toronto Tax & Accounting Solutions Inc. and reviewed by Behroz Rizvi, owner. This article provides general information and may not apply to every tax situation.

If you are starting a business or already earning self-employed income in Ontario, one question comes up sooner or later: should you stay a sole proprietor or incorporate? There is no single right answer. A sole proprietorship is simpler and cheaper. A corporation offers limited liability and a lower tax rate on profit you leave in the company, but it costs more to run. Whether you search for sole proprietorship vs corporation or sole proprietorship vs incorporation, this guide compares the two for Ontario in 2026 so you can see where you fit.

Sole proprietorship vs corporation: the short answer

• Stay a sole proprietor if you are just starting, your profit is modest, you spend most of what you earn, and you want the lowest cost and paperwork.
• Consider incorporating if your profit regularly exceeds what you need to live on, you want to separate business risk from personal assets, you plan to hire or bring on partners, or you may sell the business one day.
• Do not decide on tax alone. Incorporating mostly defers tax on money you leave in the company. When you pay yourself, personal tax applies.

Sole proprietorship vs corporation in Ontario at a glance

	Sole proprietorship	Corporation
Legal status	You and the business are the same person	Separate legal entity
Liability	Unlimited personal liability for business debts and claims	Generally limited to what you invested, with exceptions such as unremitted payroll and HST
How profit is taxed	Added to your personal income and taxed at personal rates, reported on form T2125	Corporation pays its own tax; you pay personal tax on salary or dividends you take out
Tax on profit you keep in the business	All profit is taxed to you each year, whether you spend it or not	Small business rate on the first $500,000 of active income for a qualifying Canadian-controlled private corporation (CCPC)
CPP	You pay both the employee and employer halves	Only on salary you pay yourself
Business losses	Can offset your other personal income	Stay inside the corporation
Setup and yearly cost	Low. A business name may need to be registered.	Higher: incorporation, yearly corporate return, financial statements, bookkeeping
Raising money and selling	Harder to bring in investors	Easier to add shareholders. Sale of qualifying shares may qualify for the lifetime capital gains exemption.

How a sole proprietorship works in Ontario

A sole proprietorship in Ontario is the default way to run a business alone. You do not file incorporation papers. You report your business income and expenses on form T2125 with your personal tax return, and the profit is taxed at your personal federal and Ontario rates. The Canada Revenue Agency (CRA) sets out the reporting rules on its sole proprietorships and partnerships page.

Advantages of a sole proprietorship

• Easy and inexpensive to start, with no corporate return
• Business losses can reduce your other personal income
• Simple records and a single tax return
• Full control, with no directors or shareholders to answer to

Drawbacks of a sole proprietorship

• Unlimited personal liability. If the business is sued or cannot pay a debt, your personal assets can be at risk. Ask a lawyer about your specific exposure.
• You pay tax on all profit in the year you earn it, even money you leave in the business
• You pay both halves of CPP on self-employment income
• Some clients and contracts prefer or require a corporation

Whatever your structure, you must register for GST/HST once your taxable revenues pass the $30,000 small supplier threshold. Our GST/HST registration and filing service and our Ontario HST calculator can help. For self-employed tax returns, see our self-employed tax filing service. Self-employed returns start from $149.99 plus HST, with the final fee confirmed before we start.

How an Ontario corporation works

When you incorporate a business in Ontario, you create a separate legal entity. The corporation earns the income, pays its own tax and owns the business assets. You become a shareholder, usually a director too, and you are paid through salary, dividends or both.

Advantages of incorporating

• Limited liability. In general, shareholders are not personally responsible for the corporation’s debts. Directors can still be personally liable for unremitted payroll deductions and GST/HST.
• Lower tax on profit you keep in the company. A Canadian-controlled private corporation pays a federal small business rate of 9% on the first $500,000 of active business income, plus Ontario’s small business rate.
• Flexibility on when you take money out. You can choose when and how to pay yourself, which can help you plan your personal tax.
• Credibility and growth. Easier to add shareholders, hire, sign larger contracts and sell the business.
• Possible lifetime capital gains exemption when you sell qualifying small business corporation shares.

Drawbacks of incorporating

• Higher yearly costs. You must file a corporate T2 return every year, even with no activity. Our T2 returns start from $499 plus HST for an active corporation when you provide financial statements, and from $250 plus HST for a nil return, subject to our review of the corporation’s activity.
• More paperwork: corporate records, bookkeeping, payroll if you pay yourself a salary, and shareholder decisions
• Losses stay in the corporation and cannot reduce your personal income
• Tax comes due when you take money out. Salary and dividends are taxed personally.
• Your name is public. Director information is part of the public record.

Corporate tax rates in Ontario for 2026

For a qualifying CCPC, the federal small business rate is 9% on the first $500,000 of active business income, and the federal general rate is 15%. Ontario’s small business rate is 3.2% for days before July 1, 2026 and 2.2% for days after June 30, 2026, and its general rate is 11.5%. So the combined small business rate is 12.2% before July 1 and 11.2% after, and a December 31, 2026 year-end works out to about 11.7% for the year. See the CRA’s corporation tax rates and our Ontario corporate tax rates guide for the detail.

The 2026 Ontario budget also announced that the Ontario non-eligible dividend tax credit falls from January 1, 2027. That makes taking dividends from a corporation slightly more expensive, which narrows the tax advantage of leaving profit inside a company and paying it out later. Ask us how this affects your plans.

Want to see the numbers? Our small business and corporate tax calculator for Ontario estimates federal and Ontario corporate tax on your profit, and our Ontario income tax calculator shows personal tax and take-home pay.

A simple example

Say your business earns $150,000 of profit in 2026. As a sole proprietor, all $150,000 is added to your personal income and taxed at personal federal and Ontario rates, whether you spend it or not. As a corporation, our corporate tax calculator estimates about $17,544 of federal and Ontario tax on that profit (11.7%), leaving about $132,456 in the company. If you leave that money in the company to invest or grow the business, you have deferred the personal tax. If you need all of it to live on, you will pay personal tax when you take it out, and the total tax can end up close to what you would have paid as a sole proprietor, with the added cost of running a corporation.

That is why the question is less “which pays less tax?” and more “how much of the profit do I actually need to spend?”

When should you incorporate in Ontario?

Many owners start thinking about incorporation when several of these are true:

• Your profit is regularly higher than the amount you need for your personal living expenses
• You want to protect personal assets such as your home from business claims
• You are hiring staff or taking on a partner
• Clients or contracts ask for a corporation
• You plan to sell the business or bring in investors
• You are close to, or already past, the $30,000 HST threshold and your business is growing steadily

Two cautions. First, if you work mainly for one client in a way that looks like employment, the CRA’s personal services business rules can apply to an incorporated business and take away the small business rate, so check with us before you incorporate. Second, some regulated professions have special rules for professional corporations, so confirm with your governing body.

Costs to compare

• Sole proprietor: a self-employed tax return, from $149.99 plus HST with us, and bookkeeping if you want it. Monthly bookkeeping starts from $99 CAD before HST (Standard from $249, Full Small-Business Support from $449), and your quote reflects your business size and the volume of work.
• Corporation: government filing fees to incorporate, a yearly corporate return and bookkeeping, plus payroll if you pay yourself a salary. Our incorporation service starts from $249 plus HST, and government filing fees are advised separately. We confirm our fee in writing before we start.

See our bookkeeping, payroll and corporate tax services for the full picture.

Frequently asked questions

Is it better to be self-employed or incorporated in Ontario?

Neither is better for everyone. Sole proprietorship is simpler and cheaper, while incorporating offers limited liability and tax deferral on profit you leave in the company. It tends to suit owners whose profit comfortably exceeds their living costs.

Do I pay less tax as a corporation than as a sole proprietor?

Profit left in a qualifying small business corporation is taxed at a low combined rate of about 11% to 12%. When you pay yourself, personal tax applies, so the total over time can be similar. The main advantage is deferral, not a permanent saving.

How much does it cost to incorporate in Ontario?

You pay government filing fees plus professional fees if you use an accountant. Our incorporation service starts from $249 plus HST, government filing fees are advised separately, and we confirm our fee in writing before we start. Ask for a free consultation and we will outline the full cost, including the ongoing yearly cost of a corporate return and bookkeeping.

Can I switch from sole proprietor to corporation later?

Yes. Many owners start as sole proprietors and incorporate once the business grows. Moving existing assets into a new corporation needs planning, so speak with us before you do it.

Do I still need to register for HST if I incorporate?

Yes. The $30,000 small supplier threshold applies to a corporation the same way it applies to a sole proprietor. Once you pass it, you must register and charge HST.

Next steps

If you are comparing a sole proprietorship vs corporation for your own situation, book a free consultation. We are a Scarborough tax and accounting office serving Toronto and the GTA, and you can also call (437) 410-7999 or walk in at Office 19, 695 Markham Road, Scarborough. We can compare your numbers both ways and tell you plainly what we recommend. If you are staying a sole proprietor, see how business name registration in Ontario works and what it costs.

Sources

• Canada Revenue Agency: Sole proprietorships and partnerships
• Canada Revenue Agency: Corporation tax rates
• Ontario 2026 Budget: Details of tax measures

Last reviewed: October 19, 2026. Rates are those in effect for tax years that include days in 2026. This article is general information, not advice for a specific business.