So, you want to go into business for yourself. Amazing! The decision to be your own boss is one of the most rewarding and exciting choices you’ll ever make. We’re excited for you. But, before we start celebrating, there’s one big question for you to answer: should I incorporate my business, or operate as a sole proprietorship? This choice affects everything from how you pay taxes to how much risk you’re taking on, so it’s essential that you understand the implications of each to make a fully informed decision that aligns with your goals.

Don’t worry if you’re not sure where to start—that’s what we’re here for. In this article, we’re going to break down the key differences between incorporation vs sole proprietorship and help you figure out which makes the most sense for your business. We’ll walk you through the pros, cons, and practical realities of each so you can make your decision with confidence.

Sound good? Let’s start with the basic definitions.

The Basics

What is a Sole Proprietorship?

A sole proprietorship is a type of business that is owned and operated by a single individual. The owner is personally liable for all aspects of the business, including any debts or legal issues. It’s simple to set up and doesn’t require formal registration as a separate entity. All income and expenses are reported on the owner’s personal tax return, making it a straightforward option for small or single-person businesses. Don’t worry – we’ll get into all this shortly.

What is a Corporation?

A corporation is a legally distinct business entity that is separate from its owners (in a corporation, owners are also referred to as “shareholders”). This structure protects the personal assets of the owners (shareholders) by limiting their liability to the amount they’ve invested in the business. A corporation can enter contracts, own assets, and be sued independently of its shareholders (owners). It requires a more formal setup, including registering the business, and is subject to corporate taxes and regulations.

What’s the Difference Between a Corporation and an LLC?

You may have heard the term “LLC” while researching various business structures. LLC’s do not exist in Canada. However, LLC stands for “Limited Liability Company”, which is a business structure that offers limited liability protection to its owners. This means their personal assets are generally shielded from the company’s debts and liabilities. This is similar to a corporation, except LLCs have a more flexible structure and are generally taxed as pass-through entities, meaning profits and losses flow through to the owners’ personal tax returns (the business does not pay federal income taxes). But again, this is not a business structure that exists in Alberta (or anywhere in Canada) – the closest would be a corporation.

Still with me? Okay, let’s move onto the big question:

What’s the Difference Between a Corporation and a Sole Proprietorship?

1) Liability

This is one of the biggest differences between incorporation vs sole proprietorship. We’re talking risky business – literally. With a sole proprietorship, you and your business are one and the same. Sounds simple, right? Well, it also means you’re on the hook for anything that goes wrong. If your business gets sued or racks up debt, your personal assets—your car, your house, your savings—could be on the line. Oof.

Now, if you’re in a low-risk industry (maybe you’re a freelancer or a consultant), that might not sound like a big deal. But if you’re in construction, manufacturing, or any industry where “oops” could lead to something more serious, this is worth thinking about. Incorporating separates you from your business—legally, anyway. That means your personal stuff is generally safe if the business hits a rough patch. This means the corporation takes the heat, not you.

How to Decide: If your business is low-risk and you have good liability insurance, a sole proprietorship might work just fine. But if the thought of putting your personal assets on the line makes you lose sleep, incorporation will provide the safety net you need.

meme about incorporation vs sole proprietorship

Thinking about starting a corporation? Start things off right and schedule a call with NowCPA to ensure proper setup and preparation for long-term success.

2) Taxes

Let’s be real—taxes are a huge part of this decision because we all want to save as much money as possible. Trust us, we get it. As a sole proprietor, your business income is your personal income. It’s all bundled together, so when tax season rolls around, this means it’s taxed at personal income tax rates. In Alberta, that means starting at 25% and climbing higher as you earn more.

Corporations, however, are taxed at a lower rate—usually 11% (in Alberta). That’s a huge difference! If your business is making good money, but you don’t need to take all of it home, you can leave some cash in the corporation, pay less in taxes as a result, and reinvest the rest back into the business. Pretty slick, right? With a corporation, the only thing that’s taxed personally is what you take personally as income for yourself – whether you opt to pay yourself via salary or dividends.

But it gets better: tax deferral. With a corporation, you get to control how much income you take home and when. Say your business earns a million dollars in a good year, but you only need $100,000 to live off. You can leave the rest ($900,000) in the corporation, where it’s only taxed at the low corporate rate of 11%. The rest of the money stays in the business, ready for reinvestment or future needs.

This deferral strategy works like a charm if you’re thinking long-term. Instead of taking all the money out and paying higher personal taxes, you can defer that tax hit until you actually need the income—whether that’s next year, or even during retirement. You’ll be paying taxes later, when you might be in a lower tax bracket or need less income.

Income Smoothing

Income smoothing is another consideration that can be a game-changer when comparing incorporation vs sole proprietorship. If your business income is inconsistent, incorporating can help even things out. Let’s say your business income fluctuates quite a bit – one year you rake in $800,000, and the next year you only make $50,000. As a sole proprietor, those ups and downs affect your personal income directly – your taxes could be a rollercoaster, which is extremely inefficient and results in significantly more tax than if it was smooth. But as a corporation, you can smooth out your personal income by deciding how much to pay yourself each year, keeping your personal tax rate steady. No wild swings, no surprise tax bills.

How to Decide: If you’re just starting out or running a small business with steady income, a sole proprietorship might be simpler. But if your business income fluctuates or you want to take advantage of tax deferral and reinvestment, incorporation could save you a ton in taxes long-term.

3) Costs

This is a big one when initially comparing incorporation vs sole proprietorship because it’s all about dollars and cents. Sole proprietorships are the simple, no-fuss option when it comes to costs. You report your business income on your personal tax return, and your bookkeeping can be pretty straightforward. Translation: fewer headaches and lower accounting fees.

We often get asked: How much does incorporating cost? Incorporating comes with some extra baggage—mainly more paperwork. You’ll need to file separate corporate tax returns, which means more detailed bookkeeping (you’ll be tracking assets, liabilities, and all those fun things). That also means higher accounting and legal fees. But with those extra costs come perks—namely, liability protection and tax savings.

How to Decide: If you’re keeping things simple and want to avoid extra paperwork, a sole proprietorship keeps costs low. If you’re ready to scale your business or need legal protection, the extra fees for incorporating could be well worth it.

4) Credibility

Here’s something people don’t always talk about: perception matters. For some clients, working with an incorporated business feels more legit than dealing with a sole proprietor. It’s like the difference between working with “John the Plumber” versus “John’s Plumbing Inc.” One sounds a little more established and professional, doesn’t it?

Some industries actually prefer working with corporations. It creates a clear separation between the business and the individual and helps avoid messy employee-versus-contractor issues. Plus, when you’re applying for loans or working with bigger companies, having “Inc.” or “Ltd.” after your name can give you an edge. This is a major consideration when comparing incorporation vs sole proprietorship, and one you’ll want to be realistic about.

How to Decide: If you’re in an industry where professionalism or client perception is key, incorporation could give you that extra credibility boost. But if most of your work is personal, freelance-based, or low-key, a sole proprietorship may fit the bill.

5) Flexibility

When it comes to incorporation vs sole proprietorship, it’s not set in stone. If you start as a sole proprietor and your business takes off, you can always incorporate later. You can switch the other way, too. Plenty of people do it, but it’s important to plan carefully and consult an accountant before making any moves. There are multiple tax implications that go into switching, so it’s essential that you discuss these implications with a Chartered Professional Accountant (CPA) in advance. Repeat after us: I will consult an accountant (such as NowCPA) before switching my business structure. Great.

How to Decide: If you’re just getting started and want to test the waters, sole proprietorship offers flexibility. But if you’re thinking long-term growth, incorporation could be a smart early investment.

Comparison Summary

So, what’s the verdict? Let’s sum it up:

Sole Proprietorship is great if:
- You want simplicity and lower costs.
- Your business is low-risk, and you’re not worried about personal liability.
- You’re just starting out and need flexibility.
Incorporation is a better fit if:
- You want to protect your personal assets.
- You’re earning enough that tax deferral could save you money.
- You’re in an industry where being incorporated makes you more credible or opens the doors to bigger opportunities.

Comparison Chart

So, how do the two compare side by side? Here’s a handy chart to break it down visually:

Factors	Sole Proprietorship	Incorporation
Legal Structure	You are the business—no separation between you and it.	Separate legal entity from you (the owner).
Liability	Unlimited personal liability—you’re responsible for all debts and obligations.	Limited personal liability—your personal assets are generally protected.
Taxation	Business income is reported on your personal tax return.	The corporation files its own tax return. Business profits may be taxed at a lower corporate rate.
Setup Costs	Minimal—few registration requirements.	Higher—incorporation fees and professional services (legal/accounting).
Ongoing Costs	Low—simple bookkeeping and personal tax filing.	Higher—corporate tax filings, annual reports, and legal fees.
Control	You have full control over all business decisions.	You control the business, but decision-making may involve other shareholders.
Growth Potential	Limited—raising capital or expanding can be challenging.	Greater—easier to raise capital and attract investors.

Need help deciding? Don’t hesitate to chat with an accountant or financial advisor. A little expert guidance can go a long way toward setting you (and your business) up for long-term success. Schedule a call with NowCPA to get started.

Should I Incorporate?

At the end of the day, the right choice is the one that makes the most sense for your business—both now and in the future. Hopefully by now you have a clearer view of incorporation vs sole proprietorship, but if you’re still unsure, that’s completely normal. Running a business is a journey, and you’ll never regret getting advice from a pro to make sure you’re on the right track.

Remember, you don’t have to make this decision alone. NowCPA is here to help every step of the way along your entrepreneurship journey. Whether you’re starting from scratch or looking to incorporate down the line, we can offer personalized advice that takes your unique situation into account. Schedule a consultation today to ensure your business is prepped for success—whichever structure you choose.

Incorporation vs Sole Proprietorship: 5 Factors To Decide What’s Best For Your Business