Should You Incorporate in Ontario? A Legal Guide for Business Owners

Your  business is born and held together by the foundation of its legal structure. Knowing which foundation is right for you, and if incorporation is the right path, can be challenging. Many business owners research online “how to set up a business” and will get hits from incorporation services offering to do it quickly, and cost effectively, without any real consideration if incorporating is the right foundational legal structure for their business and unfortunately find themselves incorporation prematurely or incorrectly.

What is an Incorporation:

An incorporation is a legal process of creating a separate business entity that is distinct from its owner. Governed under the Ontario Business Corporations Act (OBCA), or Canada Business Corporations Act (CBCA), a new corporation is a separate legal person with many of the same rights as a human being, such as, owning property, entering into corporate contracts, and holding responsibility for any debts, obligations and liabilities. Importantly, it is not the only legal structure available. There are several business structures available in Ontario for business owners to choose from. 

Key Differences Between a Sole Proprietorship, Partnership, and Corporation

A Sole Proprietorship is the simplest form of a legal structure in Ontario. It is a business owned and operated by one individual, with no legal separation between the business and owner. This means the owner is personally responsible for all aspects of the business, including its debts, obligations and liabilities. An individual can begin operations without making and registration as long as they market and operate the business under their full legal name. If they would like to operate under a trade name, this must be registered. 

A Partnership is a simple form of a legal structure in Ontario where two or more individuals elect to share ownership. It is not a separate legal entity, meaning, similar to a sole proprietorship, the partners have no legal separation between the business and the partners. The Partners will share all the profits, losses, and responsibilities of the business equally unless structured otherwise in a Partnership Agreement. 

A Corporation on the other hand offers the most liability protection as it separates the business owner from the business. The Corporation will be responsible for all the debts, obligations and liabilities of the Corporation, and now the owners in their personal capacity. 

What are the Main Advantages to an Incorporation?

One of the main advantages to incorporate is limited liability protection. When you incorporate, your business becomes a separate legal entity. This means your personal assets—like your home, car, and savings—are generally protected from business debts and liabilities (as long as you're not personally guaranteeing anything or acting negligently).A second, very attractive reason, to incorporate is tax planning opportunities. We preface this section by saying it is almost always advisable to get your accountant involved when incorporating, to ensure these tax planning opportunities are available to you. Corporations are taxed separately from their owners and typically benefit from lower tax rates on active business income. At the time of writing, in Ontario, the first $500,000 is taxed at 12.2%. This creates opportunities within your tax planning strategies, and to offset some taxes on the personal side should you have remained a sole proprietor. (It is important to note that EFV Legal firmly believes in involving your accountant during the incorporation process, to not only ensure you can benefit from tax planning opportunities, but to further enhance your business relationships for future Corporation Compliance measures). 

Thirdly, Professional Credibility cannot be ignored when doing business. Having “Inc.” or “Ltd.” after your business name can add a layer of legitimacy. It signals permanence, structure, and professionalism—especially helpful when bidding for contracts, attracting investors, and when dealing with clients. Have a corporation allows for stronger to access to capital as well when applying for loans, grants, or raising funds. Corporations can issue shares to raise funds and may be more attractive to investors or lenders. If you’re planning to grow, scale, or bring on partners, incorporation can make that process smoother.

Lastly, is exit planning and legacy planning. Corporations have perpetual existence. That means the business will outlive you and can continue even if ownership changes. This makes it easier to sell, transfer, or pass on the business to family members or partners.

What are the Main Disadvantages to an Incorporation?

You might be assuming at this point that there is no downside to incorporating your business, and may be convinced that this is the only path forward to starting your business venture. However, this is not true. Incorporating your company is not the right path for everyone, and can, if done incorrectly, cause headaches for a small business leading to abandonment, dissolution or worse. 

One of the key disadvantages is cost. Incorporation involves higher upfront costs, including legal fees, government filing fees, and annual expenses (like corporate tax filings and annual returns). You’ll also likely need a lawyer and accountant on an ongoing basis to ensure compliance. 

One of the most overlooked pieces of Incorporation is the complex compliance and maintenance associated with having a Corporation. Corporations are required to maintain certain records (like minute books and shareholder registers), file corporate tax returns, and comply with the OBCA or CBCA. This can add administrative and financial burden, especially for solo founders, or less than profitable ventures. Annually there are required ongoing fees on both the accounting and legal side to comply with. The Government’s position here is that they believe they’ve given you so many advantages, that staying compliant is really not a big trade off. However, for a small business, this can be very burdensome and leads many small businesses believing they incorporated sooner than they should have. It is also important to note that there is no automatic liability protection. Although limited liability is a major benefit, it’s not absolute. You may still be personally liable if you sign personal guarantees, mix personal and business finances, or act negligently. In layman's terms, having an incorporation is not a “get out of jail” free card on a Monopoly board. Liabilities will still exist within the Corporation, and can attach to the Directors.  

There is also a lack of privacy. In order to ensure transparency in the marketplace certain corporate information (e.g., directors' names and addresses) is publicly searchable. This is a trade-off for the legal benefits of incorporation. This proves troublesome for many “home-based businesses” who do not feel comfortable releasing personal information. 

And of course, if you take money out of the corporation in the form of dividends, you may face double taxation—once at the corporate level and again personally. While there are tax planning opportunities available, it really does depend on working eloquently with a tax specialist to manage this effectively. This requires ongoing costs to increase those benefits. 

Final Thoughts: Is it time to Incorporate? 

The decision to incorporate depends on your business model, risk level, tax situation, and future plans. If you're generating steady income, working with clients under contracts, or planning to grow or sell the business, incorporation might offer the legal and financial structure you need. On the other hand, if you're just starting out, a sole proprietorship may be simpler and more cost-effective—for now. This is why working with a strong legal team can make the difference for your Corporation with proper structure, advisement and education to ensure you do not run into any troubles. There is nothing stopping you from “graduating” your business from a sole proprietorship to an incorporation at a later date when the time is right.

Need Legal Advice Before You Incorporate?

At EFV Legal Professional Corporation, we help entrepreneurs and professionals across Ontario make smart, strategic legal decisions—starting with the right business structure. Contact us today for a personalized incorporation consultation.