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Jan 02, 2026
Switching from a sole proprietorship to a corporation means turning your business into its own legal entity instead of running everything under your personal name.
It can mean tax deferral (if you keep your savings in the business) and more protection of your personal assets (as it provides a corporate veil).
Once you incorporate, the corporation becomes the owner of the assets, the contractor in agreements, the employer of staff, and the taxpayer responsible for its own filings. This shift affects how taxes work, how liability is handled, and how the business grows.
If you are considering making the transition, this guide serves as a master overview that connects all major topics related to incorporation.
Below is a comprehensive breakdown of what incorporation means, why business owners make the switch, and how this decision affects legal, tax, and operational areas of your business.
What a Sole Proprietorship Is
A sole proprietorship is the simplest business structure. You and the business are legally the same person.
Key characteristics include:
- Business income is personal income
- You hold full legal and financial responsibility
- Personal and business assets are not separated
- Startup costs and registration requirements are minimal
This structure works well in the early stages of a business when risk, revenue, and operational complexity are relatively low.
For guidance on choosing the right time to incorporate, see: When Should I Incorporate My Business.
What a Corporation Is
A corporation is a separate legal entity with its own rights and responsibilities.
Key features include:
- The corporation owns assets and signs contracts
- Personal assets are generally protected from business liabilities
- Income is taxed at corporate rates
- Ownership is represented through shares
- The business can continue if ownership changes
- Record keeping must follow corporate standards
Corporations offer more flexibility and long term planning opportunities than sole proprietorships.
For a deeper look at corporate setup, see: How to Incorporate Your Business.
Why Business Owners Move From Sole Proprietor to Corporation
Here are the most common reasons entrepreneurs decide to convert their sole proprietorship into a corporation.
1. Liability Protection
A corporate structure protects your personal assets from business related risk. This becomes important when:
- You take on larger projects
- You hire employees
- You sign commercial leases
- You operate in fields where mistakes or disputes carry financial consequences
2. Tax Planning Opportunities
Incorporation gives access to several tax strategies, including:
- Lower corporate tax rates
- Dividend and salary planning
- Tax deferral by leaving money inside the corporation
- Eligibility for the small business deduction
- Potential access to the lifetime capital gains exemption later
For a full analysis of timing and tax implications, see: When Should I Incorporate My Business.
3. Credibility for Partners, and Lenders
Corporations often appear more established. This matters when:
- Bidding on contracts
- Applying for loans
- Seeking investment
- Working with larger clients
4. Growth and Succession Planning
A corporation allows you to:
- Add shareholders
- Transfer ownership
- Issue shares to investors
- Prepare for eventual sale of the business
A sole proprietorship cannot support these structures.
What Changes When You Incorporate
Transitioning from sole proprietorship to corporation affects several parts of the business.
1. Legal Structure and Ownership
The corporation becomes the legal owner of:
- Equipment
- Contracts
- Bank accounts
- Intellectual property
- Client agreements
Your role becomes that of a shareholder, director, or officer.
2. Taxation and Filings
New obligations include:
- Corporate income tax returns
- Separate accounting records
- CRA accounts for payroll and GST or HST
- Annual corporate resolutions
The way you withdraw money also changes. You no longer take profit directly. You must pay yourself through salary, dividends, or reimbursements (each of which have their own tax implications).
3. Compliance and Administration
Corporations require ongoing maintenance, such as:
- Maintaining a minute book
- Issuing shares
- Tracking shareholder loans
- Filing annual reports
- Updating corporate records
This structure provides protection and credibility but requires more organization.
How to Move From Sole Proprietorship to Corporation
The transition follows a clear sequence of steps.
1. Decide If It Actually Makes Sense
Sometimes incorporating is just an added burden - for a full analysis of timing and tax implications, see: When Should I Incorporate My Business.
2. Choose a Corporate Name
Select a legal name or choose a numbered corporation.
3. File Articles of Incorporation
Submit incorporation documents to your provincial registry or to Corporations Canada.
4. Receive a Certificate of Incorporation
This confirms the legal creation of the corporation.
5. Create Corporate Bylaws and Resolutions
These documents establish the rules for how your corporation operates.
6. Issue Shares
Determine who owns the corporation and in what proportions.
7. Transfer Sole Proprietor Assets
You may need to transfer:
- Equipment
- Contracts
- Vehicles
- Intellectual property
- Inventory
If you transfer assets like vehicles, equipment, or intellectual property into the corporation, tax rules may apply.
Two common scenarios include:
Scenario 1: Transferring a vehicle
This raises questions of taxable benefits, insurance coverage, and deductibility. See: Should I Put My Car in the Company? Pros, Cons, and Tax Considerations.
Scenario 2: Transferring assets with built-in gains
This may trigger capital gains unless you use a structured Section 85 rollover.
See: What Is a Section 85 Rollover.
8. Register CRA Accounts
Set up:
- Corporate income tax
- GST or HST account
- Payroll account if needed
9. Open a Corporate Bank Account
All business funds must flow through the corporation.
10. Update Contracts and Licenses
Notify vendors, clients, and institutions that the corporation is now the operating entity.
Bottom Line
Moving from a sole proprietorship to a corporation is a major milestone for your business. Incorporation offers liability protection, tax planning opportunities, growth potential, and long term scalability, but also requires structure, compliance, and paperwork. This master guide connects the full picture, while the four related articles provide deeper research on timing, process, tax strategy, and asset transfers.
