For many London, Ontario business owners, the question arrives sooner than expected: should I incorporate or continue as a sole proprietor? The right move can save thousands in tax and protect personal assets, yet the wrong timing or structure can increase costs and complexity without much benefit. If you run a growing operation in London or the surrounding area, your choice touches everything from how you pay yourself to how lenders view your risk, from HST filings to your eventual exit.
I have walked dozens of owners through this exact decision across trades, professional services, construction, tech, retail, and healthcare. The advice is rarely identical, but the framework is consistent. It starts with cash flow needs, profit level, and risk profile, then moves into tax rates, remuneration strategy, compliance effort, and longer‑term plans like succession or a sale. This article draws from that fieldwork and focuses on the tax impact of incorporation versus sole proprietorship for Ontario taxpayers, with an eye to the day‑to‑day realities of running a small business in London.
The core difference: you are the business vs. the corporation is the business
As a sole proprietor, your business income is your personal income. It flows onto your T1 return, taxed at progressive personal rates in Ontario. You pay Canada Pension Plan (CPP) contributions on net self‑employment income. There is no legal separation between you and the business, so liabilities can reach your personal assets, subject to exemptions.
A corporation is a separate legal entity. It earns income and pays corporate tax, then you extract money as salary, dividends, or a mix. This separation creates two layers of tax to plan around. Often that phrasing scares people, but used well, the two‑layer system becomes an advantage because you can control how and when funds move between the business and your personal hands. You also gain access to certain corporate rates, allowances, and lifetime capital gains exemption planning that are not available to sole proprietors.
Ontario tax rates and where the breakpoints appear
On the corporate side, the small business deduction in Ontario currently provides a combined federal and provincial rate near the low teens on the first $500,000 of active business income earned by a Canadian‑controlled private corporation. The exact combined rate has hovered around 12 to 13 percent in recent years. Above the small business limit, the general corporate rate sits roughly in the mid‑20s. Investment income inside a corporation is taxed at much higher rates, but part of that is refundable when you pay eligible dividends. Most small owner‑managed firms care primarily about active business income.
On the personal side, Ontario’s combined federal and provincial marginal rates rise as income increases. Once you clear the middle brackets, marginal rates can exceed 40 percent, and at high levels push beyond 50 percent. A sole proprietor with $150,000 of net income often faces a marginal rate in the 43 percent range, depending on credits and other income. That difference alone hints at why incorporating can matter, but it is not as simple as comparing rates. You only gain from the low corporate rate if you can leave funds in the company. If you must pull out nearly all profits to pay your mortgage, debt, and living costs, personal and corporate systems tend to converge after salary, CPP, and dividend tax are accounted for.
The first key threshold appears around the point where your business generates more cash than you need to live on. For some families in London, that is $90,000. For others, it is $150,000. Once you consistently retain, say, $30,000 to $50,000 per year after paying yourself, incorporation begins to pull ahead on tax deferral alone. That deferral compounds when left invested inside the company, which is where the long‑run advantage really grows.
Deferral vs. absolute tax savings
A common misunderstanding is that incorporation always reduces overall tax. In many cases, especially in early years, the main benefit is deferral. If your corporation pays 12 to 13 percent on profits kept inside the company, you can leave those funds to finance growth, equipment, or a buffer. When you eventually distribute the money as dividends, personal tax shows up. Canada’s system aims for “integration,” which means the combined corporate and personal tax on active income, when fully distributed in the same year, should roughly match what you would have paid as a sole proprietor. In practice, integration is close but not perfect. There can be minor leakage or savings depending on income level, credits, and whether remuneration is salary or dividends.
This deferral still matters. Many London owners use retained earnings to fund expansion without borrowing at high rates, to pre‑buy materials, or to survive seasonal swings. I have clients in construction who would have paid an extra six figures in interest over several years if not for the working capital they built through corporate deferral.
Paying yourself: salary, dividends, or a blend
With a corporation, you decide how to extract profits. Salary is deductible to the corporation, reduces corporate income, and creates RRSP contribution room. It triggers CPP contributions and, if high enough, employment insurance if you participate. Dividends are not deductible to the company. You pay personal tax on them at dividend rates, which are lower than regular income tax at some levels but can climb at higher incomes.
Most owners in London adopt a blended approach. They set a base salary to contribute to the CPP and maintain RRSP room, then top up with dividends to smooth personal cash flow and reduce payroll compliance. A pure dividend strategy can work for some, especially where CPP participation is less attractive, but it forfeits RRSP room and can complicate mortgage underwriting, as some lenders still prefer T4 income. A pure salary strategy simplifies integration math and can be easier for child‑care expense claims and other income‑tested benefits, but it may miss dividend rate advantages. This is where a corporate tax accountant in London earns their fee. Small adjustments to salary and dividend mix can change your personal tax, RRSP strategy, and company’s refundable tax accounts.
HST, payroll, and compliance workload
Both sole proprietors and corporations in Ontario register for HST when their taxable supplies exceed $30,000 in a four‑quarter period, or earlier by choice. Incorporation does not change the existence of HST, but it changes the account ownership. You will close or amend the sole proprietorship’s HST account and open a corporate HST account, carry numbers forward properly, and make sure the effective date aligns with your first corporate invoice. This handoff causes more compliance friction than most expect, particularly for QuickBooks or Xero setups and recurring receipts with vendors. A well‑organized transition avoids double‑charging or missed credits.
Payroll becomes more substantial once you pay a salary from the corporation. You will need to register a payroll account, remit source deductions on schedule, and issue T4s. Dividends require T5 slips. These tasks are straightforward for a trained bookkeeper but can be painful if left for March. If bookkeeping has lagged, you will spend more each year with your London ON accountant for tax preparation and cleanup than you would on proper monthly bookkeeping. It is not unusual to see the bookkeeping bill more than pay for itself by catching HST input credits and avoiding penalties.
Liability, risk, and contracts
Liability is not a tax concept, but it surfaces in any incorporation conversation. A corporation adds a layer of protection between business operations and your personal assets. It is not absolute. Banks still ask for personal guarantees. Directors can be personally liable for unremitted HST, source deductions, and some environmental or safety failures. Still, the corporate veil helps in ordinary contractual disputes. In construction, design, or food manufacturing, even a modest improvement in risk separation can be worth the ongoing corporate costs. In low‑risk consulting, I have seen owners stay sole proprietors longer if their profit needs and lifestyle do not yet justify the extra compliance. Context matters.
Example: a London trades contractor at the tipping point
A contractor in London nets $180,000 before paying themselves. As a sole proprietor, after deductions, their personal tax is high and they must make large CPP contributions on the full amount. Cash is tight because they draw most of the profit to cover living costs and truck payments.
Incorporating this contractor can work if they can cap personal draws around $120,000. The company then pays corporate tax, retains perhaps $40,000 to $50,000, and builds a cushion for materials and equipment. Through a salary of $80,000 and dividends to top up, they preserve RRSP room and manage CPP participation. After one year, the company has enough retained earnings to negotiate supplier discounts for upfront purchases, which quietly improves margins. The tax deferral did not eliminate tax, but it gave them control and a working capital engine.
Example: a solo therapist with steady but modest profits
A registered therapist in London nets $90,000. They need almost all of it to live and contribute to savings. Incorporating introduces bookkeeping for a corporation, payroll filings if they pay salary, T2 corporate returns, and legal fees, with almost no net deferral because the funds must be paid out each year. In this case, staying a sole proprietor is often the right call until profits rise or personal spending falls. The tax preparation burden is lighter, and they avoid higher professional fees.
Passive income, investments, and the grind of the adjusted aggregate investment income rules
If you build investments inside a corporation, passive income in excess of a modest threshold erodes access to the small business rate in subsequent years. The rules around adjusted aggregate investment income are intricate. In practical terms, if you intend to accumulate a sizable investment portfolio using retained earnings, you need a plan that accounts for the small business limit grind. Some owners respond by paying themselves enough dividends to invest personally, where passive returns do not reduce the company’s small business limit. Others use corporate‑class funds or insurance structures. This is an area where bespoke advice matters more than generic theory.
Income splitting and family involvement
Before the tax on split income rules tightened, many owners paid dividends to low‑income adult family members to reduce overall tax. Those options are limited now, but not gone. If a spouse works in the business at a reasonable salary, that salary is deductible. If a family member is genuinely active and meets specific criteria, dividends can still be paid in some cases without punitive tax. A payroll services team that understands reasonable compensation benchmarks for London roles can help defend salaries while keeping the CRA comfortable.
The lifetime capital gains exemption and future sale value
One of the quiet advantages of incorporation is the possibility of selling shares of a qualifying small business corporation and using the lifetime capital gains exemption. The limit has changed over time and exceeds $1 million for qualified small business corporation shares. This is a complex area with purification steps and timing rules, but the potential tax savings on a future sale can overpower several years of extra compliance costs. If a sale is plausible within five to ten years, incorporating early, maintaining clean books, and managing passive assets to keep the company “pure” can be worth it.
How compliance costs stack up in the real world
Sole proprietors typically file a T1 with a business schedule, maintain an HST account if applicable, and keep books that a tax accountant can parse without too many hours. A corporation adds an annual T2, corporate financial statements, T4 and T5 slips if applicable, a minute book and annual resolutions, and potential payroll audits. The professional fee difference in London varies by firm and complexity, but expect several thousand dollars per year for a corporation compared with hundreds to low thousands for a sole proprietor. If you already hire bookkeeping in London Ontario, that mitigates the jump because clean monthly books reduce the year‑end bill. Owners who try to do everything in April spend more with accounting firms London Ontario than owners who keep real‑time records.
Banking, mortgages, and the optics of income
Many London lenders still prefer T4 income for mortgage underwriting. Dividend‑only strategies can cause friction. If you plan a home purchase or refinance within a year, discuss this with your accountant and banker. We often set a modest salary to satisfy underwriters and round out the rest with dividends. Some lenders accept a blend plus the corporation’s financial statements, but not all. The right mix depends on your debt plans as much as your tax plans.
HST quick method vs. regular method: small operational wins
Sole proprietors and corporations alike may benefit from the HST quick method if they have low input tax credits relative to collected HST, which is common in service businesses. The choice should be revisited when you incorporate because the corporate entity starts fresh and you must elect again if you want the quick method. I have seen owners leave $2,000 to $5,000 per year on the table by forgetting to reassess this election during incorporation.
Transition timing and clean handoffs
When you move from sole proprietor to corporation, picking the effective date matters. You want to avoid HST overlap, duplicate vendor accounts, and confusion with customers. Run the old business until the day before the corporation begins invoicing. Open a new bank account for the corporation and never mix funds. Transfer key assets at fair market value or through a Section 85 rollover to avoid unnecessary tax. Keep a simple spreadsheet that lists each item you moved into the company, with date and value, then share it with your tax accountant London Ontario at year‑end. Clean records cut your fees and protect you during any CRA review.
Owner compensation and CPP realities
CPP is a sticking point. As a sole proprietor, you pay both employee and employer portions on your net income up to the yearly maximum, which can be several thousand dollars. Inside a corporation, you only pay CPP on the salary portion. Dividends do not attract CPP. Some owners prefer dividends to avoid CPP costs, especially if they do not view CPP as a good investment. Others value CPP as a base retirement income and will choose a salary sufficient to maximize CPP contributions. A balanced approach often wins in practice, particularly when RRSP planning and mortgage qualification are considered alongside CPP.
Insurance, WSIB, and industry specifics
Professional liability coverage, general commercial liability, and WSIB obligations may change or need to be rewritten once you incorporate. In trades and healthcare, this can be a meaningful administrative step. A local broker who understands how London carriers view corporate structures can shortcut the process. The cost is usually manageable, but the timing and paperwork can catch people off guard in the rush to start invoicing under the new corporation.
The point where incorporation usually pays
Patterns emerge after seeing enough cases around London:
- If your net business income is below about $80,000 and you need it all to live, sole proprietorship is often fine for now. If you regularly keep $30,000 to $50,000 or more in the business after paying yourself, incorporation generally pays via tax deferral and compounding retained earnings. If your industry carries meaningful liability or you plan to hire staff and sign bigger contracts, incorporation tends to make sense earlier. If a future sale is plausible, incorporation unlocks lifetime capital gains exemption planning that a sole proprietorship cannot match.
These are guideposts, not rules. Family income, other assets, debt goals, risk tolerance, and health all move the needle. A tailored forecast that shows personal and corporate tax under different compensation mixes, plus a look at after‑tax cash in hand, clarifies the decision.
What to prepare before you meet a corporate tax accountant in London
Bring a recent profit and loss, balance sheet if available, last year’s personal tax return, and a draft budget of living costs. Note your HST status, payroll needs, and any upcoming financing or home purchase. List your short‑term goals, like hiring one person in six months or buying a van next spring. An experienced corporate tax accountant London will map these facts to a compensation plan and a compliance calendar so you know exactly what filings and deadlines apply after incorporation. The best plans focus not only on tax rates but also on cash timing, lender optics, and workload.
How local support changes the math
Using a local tax service is not just about convenience. In practice, a London ON accountant who knows the municipal environment, common lenders, and the quirks of local contractors and professional associations can save you time. When your bookkeeper is nearby, you can resolve HST issues quickly. If you lose a receipt, you can often replicate it by contacting a local supplier your accountant already knows. The combination of tax services London Ontario and bookkeeping London Ontario pares down friction. Fast, accurate numbers prevent penalties and allow you to make better decisions in season, not months later.
Owners who try to hunt for an “accountant london” or “accounting firms near me” at the last minute often choose based on price alone. Rates matter, but what you want is a firm that answers quickly, documents remuneration plans, and shoulders the year‑end load without surprises. The extra hundred dollars you save on a bargain quote can vanish in interest and penalties if a filing is late or a HST election is missed.
The sole proprietor who never incorporates
Not everyone should incorporate. Some London professionals keep small, steady practices, prefer simplicity, and have minimal liability. They value a single tax return, straightforward RRSP contributions, and the absence of corporate paperwork. Their lenders are comfortable with T1 income, and they do not plan to sell a business. For them, the math and the lifestyle line up. The right answer respects their goals.
The incorporated owner who scales
On the other end sits the owner who uses the corporation as a platform. They fund growth from retained earnings, pay themselves a mix of salary and dividends tailored to each year, and keep a clean minute book. They invest in bookkeeping so year‑end is a formality. When they talk to a bank about a line of credit, they show tidy financials and get better terms. When an opportunity to acquire a competitor appears, they are ready. That arc starts with the same decision point most readers face today.
Practical next steps for London business owners weighing the choice
The fastest way to clarity is a simple side‑by‑side projection. Estimate your business https://cruzzcxg129.lowescouponn.com/tax-preparation-london-ontario-seniors-tax-tips-and-benefits profit for the next year. Forecast your personal cash needs. Price out bookkeeping and tax preparation London Ontario for both options. Then layer in risk, banking goals, and any plans to hire or sell. Owners who do this exercise rarely feel stuck after.
If you want a local perspective, look for a tax accountant near me who understands both sole proprietorship and corporate structures. Ask how they approach salary versus dividend planning, HST elections, and the small business deduction. Discuss your industry specifics. A carpenter’s plan is not a therapist’s plan, and a tech consultant with U.S. clients brings cross‑border wrinkles that demand care.
The choice between incorporation and sole proprietorship is not once and done. Your business will outgrow its early structure more than once. The right London ON accountant will help you revisit the decision as numbers change, and will keep the paperwork tuned so you spend your time where it counts, serving customers and strengthening the enterprise you are building.