Sole Proprietor vs. Corporation: What’s Better for Taxes?

Starting a business in Canada? One of the first big decisions you'll face is: Should you stay a sole proprietor or incorporate your business?

Let’s keep it real, this isn’t just about paperwork. It's about how much you’ll pay in taxes and how much money stays in your pocket.

Here’s the breakdown, minus the legal mumbo jumbo.

What Is a Sole Proprietor?

You = the business. Simple. Low-cost. You report your business income on your personal tax return. If you made $40K freelancing last year, it’s taxed just like regular income from a job.

Pros:

• Super easy to start (no legal fees or complex filings)

• Fewer reporting requirements

• You can deduct business expenses

Cons:

• You’re taxed at personal income tax rates (up to 50% in some provinces )

• No separation between you and your business — your personal assets are on the line

• Harder to scale

What About Incorporating?

Incorporating = your business becomes a separate legal person. Yes, legally — your business is now like a tiny robot Canadian citizen.

Pros:

• Flat corporate tax rate (~12%-15% for small businesses)

• Potential to defer taxes (don’t need to withdraw all your income right away)

• Limited liability = personal assets protected

• More credibility (and often required for bigger contracts)

Cons:

• More paperwork & upfront costs (legal + accounting fees)

• Need to file separate corporate tax returns

• Less flexible for pulling money out — salaries, dividends, etc. all need planning

  
  

So… Which One’s Better for Taxes?

It depends. But here’s a cheat sheet:

If You’re Earning…	You Might Want To…
Less than $50K/year	Stay a Sole Proprietor (for now)
$60K - $100K+	Consider Incorporating
Not taking all profit out personally	Incorporate to defer taxes
Scaling or seeking investors	Incorporate ASAP

Quick Example:

Sarah the graphic designer earns $45K/year. She keeps it simple as a sole prop. David the tech consultant earns $120K/year but only needs $60K to live on. He incorporates, leaves the rest in the company, and pays way less tax.

Final Word

If you're just getting started, sole proprietorship is chill. But if your income is growing (or your dreams are big), incorporating can be a tax-smart move.