Sole proprietor vs corporation, in detail
Beyond "incorporate at $100K profit". The trade-offs that actually drive the decision.
Published April 2, 2025 · 9 min read
The decision to incorporate is part math, part operating reality. The rule of thumb is $80K to $120K of profit. The actual decision involves your industry, your risk profile, your future plans, and your tolerance for paperwork. Here is a more honest version of the framework.
Sole proprietor advantages
Simpler taxes: you file T2125 with your personal return. No separate corporate return.
Lower fixed cost: no annual minute book, no separate bank account required, no incorporation costs.
Business losses offset other personal income. Useful when you have a side business losing money against W2 employment.
Faster to start: register for a business number, you are done.
Sole proprietor disadvantages
Unlimited personal liability. Lawsuits, debts, contract disputes can come after your house.
All profit taxed at your personal rate. No Small Business Deduction. No income smoothing.
Harder to attract co-founders, employees, or investors. There are no shares to issue.
No tax deferral on retained earnings.
Corporation advantages
Small Business Deduction: 9 percent federal corporate rate on first $500K of qualifying income vs 15 percent general rate.
Income smoothing across years. Pay yourself dividends only when you need cash.
Tax deferral. Keep retained earnings in the corporation; defer personal tax until you draw them.
Liability protection. Personal assets are separate from corporate assets (mostly).
Lifetime Capital Gains Exemption on sale of qualified small business corporation shares.
Easier to sell, partner, or raise capital.
Corporation disadvantages
Higher fixed cost: $1,500 to $5,000 per year for a basic accountant, plus minute book maintenance.
Separate bank account, separate books, separate return.
Cannot use business losses against personal income.
Strict rules about commingling personal/corporate funds.
When the math is overwhelming
Past $100K of consistent annual profit you are almost certainly better off incorporated.
If your industry has any meaningful liability exposure (you sign contracts, you have employees, you make physical products), incorporate even at lower profit levels.
If you plan to raise outside capital ever, incorporate now to avoid messy reorganizations later.
Incorporation is not free, but it is rarely the wrong long-term call past $100K of profit. The question is timing. If you are growing fast, do it now. If you are at $50K and flat, wait.