How to Choose the Right Business Structure When Registering a Business in Ontario

Vector illustration of a person confused about registering a business in Ontario

Introduction: Why Your Business Structure Matters

Registering a business in Ontario involves more than just completing forms. One of the most important early decisions is choosing your business structure. Most entrepreneurs in Ontario choose between a sole proprietorship and a corporation. This decision impacts taxes, liability, paperwork, and your ability to grow or attract investment.

Think of a sole proprietorship like riding a bicycle. It’s quick to get started and easy to steer, but you’re more exposed if something goes wrong. A corporation, by contrast, is like driving a car with safety features. It requires more maintenance and paperwork but offers better protection.

70% of Canadian businesses operate as sole proprietorships, making it the most common structure for entrepreneurs due to low startup costs and simplicity

What Are the Options When Registering a Business in Ontario?

Most small businesses in Ontario register under one of these two structures:

Sole Proprietorship in Ontario

This is the simplest and most common way to start a business.

Pros:

  • Easy and inexpensive to register
  • Complete control over decisions
  • Less paperwork
  • Income is reported on your personal tax return

Cons:

  • You are personally responsible for all debts
  • Raising money from investors can be difficult
  • Limited tax planning options

Incorporating a Business in Ontario

Incorporation creates a separate legal entity for your business.

Pros:

  • Limited personal liability
  • Lower tax rate on the first $500,000 of active income (around 12.2%)
  • Possible income splitting and tax deferral
  • Easier to attract investors

Cons:

  • Higher startup and ongoing accounting costs
  • Separate tax return required
  • Need to keep detailed corporate records

CRA Requirements for Each Structure

For Sole Proprietors:

  • Register your business name with ServiceOntario (unless using your legal name)
  • Report income using Form T2125 with your personal return (T1)
  • HST registration is required if you earn more than $30,000 per year
  • CRA business number is optional unless you need it for HST, payroll, or importing/exporting

For Corporations:

  • Incorporate federally or provincially through ServiceOntario or Corporations Canada
  • A CRA business number is automatically issued
  • You must set up a corporate tax account, and possibly HST and payroll accounts
  • File a corporate tax return (T2) within six months of fiscal year-end

What Are the Tax Implications of Each Structure?

Tax FactorSole ProprietorshipCorporation
FilingPersonal return (T1) + Form T2125Corporate return (T2) + T1 for personal income
Tax RateUp to 53.53% in Ontario~12.2% for first $500,000 of active business income
CPP ContributionsOwner pays both employer and employee portionsApplies only to salaries paid to shareholders
LossesCan offset other personal incomeLosses stay within corporation
Income Splitting/DeferralNot availablePossible with family shares or retained profits

When Should You Incorporate in Ontario?

You should consider incorporation when:

  • Your business earns over $75,000 annually
  • You want limited liability protection
  • You plan to attract investors or raise capital
  • You want to reinvest profits and defer taxes
  • You’re building long-term equity or selling the business later

If you’re just testing an idea, freelancing, or earning minimal income, starting as a sole proprietor may be more practical.

FAQs About Registering a Business in Ontario

1. Do I need to register my business name?
Yes, unless you’re operating under your exact legal name. Sole proprietors must register through ServiceOntario, and corporations choose a name during incorporation.

2. Can I change from sole proprietor to corporation later?
Yes, but you’ll need to register a new entity, possibly transfer assets, and notify the CRA. A professional can help structure the transition efficiently.

3. Do both structures need a CRA business number?
Not necessarily. Sole proprietors only need one if registering for HST, payroll, or importing. Corporations are automatically issued one upon incorporation.

Final Thoughts: Choosing Smart When Registering a Business in Ontario

Choosing the right structure when registering a business in Ontario isn’t just a legal formality. It affects how much tax you pay, the level of personal liability you take on, and how your business can grow in the future. While a sole proprietorship may work well for getting started, incorporation might offer advantages as your business income increases or your plans evolve. Understanding these differences early can help you avoid costly changes later.

If you’re uncertain about which structure fits your goals, AccTax offers support to help you evaluate your options. We walk you through each step of the registration process and help ensure your setup aligns with your financial and legal needs.

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