Is it better to be self-employed or incorporated in Ontario?

There is no single "better" option—whether you should operate as a sole proprietor (self-employed) or incorporate in Ontario depends entirely on your net income, liability risk, and long-term business goals.

A common rule of thumb in Ontario is to start as a sole proprietorship when you are testing a business idea or have lower revenue. You can always incorporate later once your business grows.

Consider incorporating if:

1. You earn more money than you need to live on. Corporations benefit from the Small Business Deduction, offering a much lower tax rate on active business income left inside the company. This allows you to defer personal taxes and reinvest the savings into the business.
2. Your business carries significant liability risks. If you are sued or go bankrupt, a corporation generally protects your personal assets (like your house and personal savings), whereas a sole proprietorship leaves your personal assets fully exposed.
3. You plan to sell the business or raise capital. Investors strongly prefer corporations, and selling shares of a corporation can qualify you for the Lifetime Capital Gains Exemption.

Stick to being a sole proprietor if:

1. You spend all the profit your business makes on personal living expenses (meaning tax deferral won't help you).
2. Your business is operating at a loss. Sole proprietors can deduct business losses against other personal income (like a salary from a day job), which corporations cannot do.
3. You want to avoid the high legal and accounting costs of maintaining a corporation, which requires filing a separate T2 corporate tax return every year.