Choosing a business structure in Canada: sole proprietorship, partnership or corporation

This guide is general information, not legal or tax advice. Rules differ by province, and the right structure depends on your income, risk and plans; speak to a lawyer and an accountant before you decide.

The three main structures

Sole proprietorship

One person in business on their own account, with no separate entity. It is the default when you start selling your work. Business income goes on Form T2125 with your personal T1 return, so profit is taxed at your personal rates in the year it is earned. You pay both the employee and employer share of CPP on your self-employed earnings. Self-employed individuals file by June 15, but any balance owing is due by April 30. You are personally liable for the business's debts. See the T2125 guide for how the books map to each line.

Partnership

Two or more people carrying on business together for profit. Each partner reports their share of the income on their own T2125, and some partnerships must also file a T5013 partnership information return. In a general partnership every partner is personally liable for the partnership's debts. Most provinces also allow limited partnerships and, for certain professions, limited liability partnerships. A written partnership agreement covering shares, contributions and what happens when someone leaves is essential.

Corporation

A separate legal person, created by incorporating federally or with a province. The corporation files its own T2 return and pays its own tax; shareholders are not generally liable for its debts beyond what they invested, though lenders often ask owners for personal guarantees. For a Canadian-controlled private corporation (CCPC), active business income up to the $500,000 business limit qualifies for the small business deduction, bringing the federal rate down to 9%; the general federal rate after the general reduction is 15%. Provincial tax is added on top.

The owner gets money out as a salary (through payroll, with CPP and income tax deducted, and a T4), as dividends (with a T5 slip), or a mix. The T2 is due six months after the year-end; the balance of tax is due two or three months after year-end, depending on the corporation.

Side by side

Federal or provincial incorporation

You can incorporate under the federal Canada Business Corporations Act through Corporations Canada, or under your province's corporations act.

• Federal incorporation costs $200 online and is usually processed in about one business day. The name is protected across Canada, and you can operate anywhere, but you must also register (extra-provincially) in each province or territory where you carry on business. Federal corporations file an annual return with Corporations Canada ($12 online) and must keep a register of individuals with significant control and file that information with Corporations Canada. A federal corporation automatically gets a CRA business number and corporation income tax account.
• Provincial incorporation registers the company in one province, with that province's fees, forms and annual filings. If you will only ever operate in that province, it is often the simpler choice. Operating in another province later means registering there too.

Either way you will need a name (a numbered company is also possible), a registered office address, at least one director, and articles of incorporation. Many provinces and Corporations Canada ask for a NUANS name search report when you choose a named company. In Quebec, businesses register with the Registraire des entreprises and receive a Quebec enterprise number (NEQ).

What changes in your books

Invoices, bills, GST/HST and the bank work the same way under every structure. The differences are in equity and in how the owners are paid:

• Sole proprietorship: an owner's equity (capital) account and an owner's drawings account. Drawings are not an expense and do not reduce profit. Your personal income tax and CPP are not business expenses either; they are paid from drawings. See owner draws vs contributions.
• Partnership: a capital and drawings account for each partner, so the year-end allocation of profit is easy to prepare.
• Corporation: share capital, retained earnings, dividends declared, and a shareholder loan account for money moving between you and the company. Watch the shareholder loan: amounts the company lends you and does not get back within the CRA's time limits can be added to your income. A salary to you goes through payroll with a T4, and you may be EI-exempt if you control more than 40% of the voting shares.

Open a separate business bank account in every case. For a corporation it is required in practice: the company's money is not yours until it pays you.

How to decide, step by step

1. Estimate profit and what you need to live on. If you will spend everything the business makes, incorporating saves little tax. If profit will regularly exceed your personal needs, the corporation's lower rate on retained profit starts to matter.
2. Weigh the risk. Employees, leases, inventory and work on client premises all add risk. Insurance is the first line of defence; a corporation is the second.
3. Count the cost. A corporation needs its own T2, financial statements, a minute book and annual filings, plus payroll if you take a salary. Ask your accountant what their year-end fee would be.
4. Think about where you will operate. One province points to provincial incorporation; several, or a national brand, points to federal.
5. Plan the timing. Converting a profitable sole proprietorship to a corporation later is common; an accountant can often transfer the assets on a tax-deferred basis.
6. Register. Incorporate or register the business name, then open the CRA program accounts you need. See how to get a CRA business number.

Checklist

• Estimate profit for the next two years and how much you will take out
• List the risks and get insurance quotes
• Write a partnership agreement or shareholders' agreement if there is more than one owner
• Choose federal or provincial incorporation, if incorporating
• Choose a name and get a NUANS report if your jurisdiction asks for one, or use a numbered company
• Incorporate, or register the business name with your province
• Get the CRA business number and the RT, RP or RC accounts you need
• Open a business bank account in the business's legal name
• Set up equity accounts for your structure: capital and drawings, or share capital and shareholder loan
• Diary the filing dates: T1 by June 15 (balance April 30) or T2 six months after year-end

In AcboBooks

The Canadian edition of AcboBooks works for proprietorships, partnerships and corporations; you shape the equity section to match. A new company starts with Owner's Equity, Owner's Draw and Retained Earnings. Rename them or add partners' accounts, share capital and a shareholder loan account in the chart of accounts. If you take a salary from your corporation, payroll follows the CRA's T4127 formulas, and each employee record has a box for EI exemption, which a controlling shareholder can use. The Academy track on Canadian payroll covers the setup.

Sources and official links

• CRA: Sole proprietorships and partnerships
• CRA: Corporation tax rates
• Corporations Canada: Services, fees and processing times
• Corporations Canada: Benefits of incorporating
• CRA: Partnership information return (T5013)
• Government of Canada: Starting a business

Last reviewed October 26, 2026. Government pages change; if a figure here differs from the official page, the official page wins.

Frequently asked questions