Sole Proprietorship vs. Incorporation in Canada

As a sole proprietor, you and your business are legally the same person. If your business is sued or can’t pay its debts, your personal assets — your home, car, savings — are on the line.

A corporation is a separate legal entity. Shareholders are generally not personally liable for corporate debts. We’ve seen BC business owners breathe easier knowing their family home is protected when they incorporate.

Sole proprietorship is straightforward: file a T2125 form with your personal tax return, keep receipts, track income and expenses. No separate T2 return, no corporate minutes, no annual filings.

Incorporation means annual T2 corporate tax returns, corporate minutes, annual BC registry filings, and often a separate bank account and accounting software. Expect $1,500–$3,000+ per year in additional accounting costs.

We’ve helped dozens of BC entrepreneurs set up their corporations and the consensus is: the extra paperwork is manageable, but you need good bookkeeping habits from day one.

As a sole proprietor, you simply draw money from the business — it’s all personal income. No T4, no payroll, no source deductions.

As an incorporated owner-manager, you can pay yourself a salary (T4, payroll deductions, CPP) or dividends (no CPP, no T4, but no RRSP room either). Many owner-managers use a blended approach.

One client we worked with in Vancouver started as a sole prop earning $80K, incorporated at $120K, and saved roughly $8,000 in combined taxes in year one by splitting salary and dividends.