Small Business Resources | CFIB

Incorporation vs. sole proprietorship: how should you structure your business? | CFIB

Written by Business Resource Advisor | Aug 26, 2025 4:00:00 PM

Choosing the right structure is one of the most important decisions you’ll make when starting or growing a business in Canada. Two of the most common structures are sole proprietorships and corporations (also called incorporated businesses). Both options come with distinct advantages and obligations, and the right choice depends on your goals, risks, and tax situation.

What is a sole proprietorship?

A sole proprietorship is the simplest and most common business structure in Canada. It means the business is not a separate legal entity from the owner. You personally own and operate the business, and you’re entitled to all profits — but also responsible for all debts and obligations.

Pros:

  • Easy and inexpensive to register (or not required at all in some provinces if operating under your personal name)
  • Full control of business decisions
  • Simplified tax filing — business income is reported on your personal tax return
  • Lower administrative burden (e.g., no corporate filings, fewer recordkeeping rules).

Cons:

  • Unlimited personal liability — you’re personally responsible for business debts and lawsuits.
  • Limited tax planning opportunities — income is taxed at your personal rate.
  • Harder to raise capital — lenders and investors may prefer incorporated businesses.
What is an incorporated business?

Incorporation creates a separate legal entity for your business. This means the business can own assets, sign contracts, and be liable for debts — distinct from you personally.

Pros:

  • Limited liability — your personal assets are protected from most business debts and legal actions
  • Tax advantages — corporations may qualify for the small business tax rate and income splitting (talk to an accountant)
  • Easier to raise capital — incorporation can make your business more attractive to investors
  • Continued existence — the business continues even if you leave or sell it

Cons:

  • More complex and costly to set up and maintain (e.g., incorporation fees, legal assistance, annual returns)
  • Separate tax filings for the corporation
  • Ongoing recordkeeping and legal compliance obligations
How to decide: Ask the right questions

There’s no “one-size-fits-all” answer — the right choice depends on your business size, industry, income level, and risk exposure. 

Ask yourself:

  • Do I need liability protection?
  • Am I earning enough to benefit from small business tax rates?
  • Am I planning to grow or bring on partners?
  • Can I handle the costs and paperwork of incorporation?
Final Tip: Talk to a Professional

While it’s possible to incorporate on your own, it’s usually wise to speak with a lawyer or accountant first. They can help you make the best decision for your unique situation and ensure your business gets off to the right start.

Need legal help?

Through our partnership with LawVo, CFIB members have access to legal advice from licensed Canadian lawyers to help them choose a structure, review contracts, or understand their legal obligations.

Not a CFIB member? Join today to access LawVo legal services and a great number of free HR and business management resources available to you on the Member Portal.

Have questions or need personalized advice? Our Business Advisors are here to help:
1-833-568-2342 | hrnow@cfib.ca


 
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