From Self-Employed to Incorporated: A Complete Guide

From Self-Employed to Incorporated: A Complete Guide for New Business Owners in Canada

A lot of Canadians run a small business — but did you know your tax responsibilities depend on how it’s set up?

✅ Self-employed = Personal tax return + business form (T2125)
✅ Incorporated = Full T2 corporate return + extra compliance steps

👉 In our guide, we break down the key differences, CRA requirements, and common mistakes to avoid when you're growing your business. Whether you're freelancing, running a side hustle, or thinking of incorporating, this post is for you.

So, you've been running your own business as a sole proprietor, and things are picking up. Maybe you're making more money, signing bigger contracts, or hiring help. Now you're wondering: Should I incorporate? What’s involved? What changes?

You're not alone — and this guide will walk you through exactly what you need to know when making the shift from self-employed to incorporated in Canada.

❓ What Does “Small Business” Really Mean?

Many people say they “own a small business,” but it’s important to understand what that actually means for taxes and legal purposes. In Canada, a small business can take different legal forms, and each one has different rules:

• Self-Employed (Sole Proprietor):
  You and the business are the same person. You report income and expenses on your personal tax return (T1), using a form called T2125.

• Partnership:
  Two or more people run the business together. You still file on your personal taxes, but you split the income and expenses.

• Incorporated Business (Corporation):
  A separate legal entity. The business files its own tax return (T2), and you get paid as an employee or shareholder.

👉 So when you say you're a “small business owner,” you might be any of these — and it’s important to know which one you are, so you follow the right tax and legal steps.

✅ Why Incorporate Your Business?

Incorporating means creating a separate legal entity for your business. It comes with real advantages:

🔒 1. Limited Liability

Your personal assets are protected. If your corporation gets sued or goes into debt, your house and personal savings are (usually) off-limits.

💵 2. Tax Benefits

Corporations are taxed at lower rates than individuals. You could save thousands by paying yourself a combination of salary and dividends.

💼 3. More Professional Image

Having “Inc.” or “Ltd.” on your company name gives you credibility — especially when working with larger clients or government contracts.

💰 4. More Financing Options

Banks and investors are more comfortable lending to corporations. You can also sell shares if you want to grow or bring in partners.

📋 What Changes When You Incorporate?

Moving from sole proprietor to incorporated means new responsibilities, especially around bookkeeping, payroll, and taxes.

🧾 1. You’ll Need to File a Corporate Tax Return (T2)

Unlike a self-employed return (T2125 on your personal tax), corporations file a separate T2 return. It’s more complex and usually requires an accountant.

📚 2. You Must Keep Proper Books and Records

That means tracking:

• All income and business expenses

• Bank and credit card transactions

• Receipts and invoices

• Any assets like tools, equipment, or vehicles

We recommend using accounting software like QuickBooks or having a bookkeeper handle it for you.

👨‍👩‍👧‍👦 3. If You Hire Employees (or Pay Yourself a Salary), You Need Payroll

You must:

• Register for a payroll account with CRA

• Deduct and remit income tax, CPP, and EI

• File T4 slips each year

Even if you’re the only employee, this applies if you want to pay yourself a salary and contribute to your CPP for retirement.

📝 Other Things You Might Need to Do

Depending on your industry and where you operate, you may also need:

• Municipal Business License

• GST/HST Registration (if your revenue exceeds $30,000/year)

• WSIB or WCB registration for workplace insurance (if hiring staff)

• Trade Name or Master Business License (if operating under a different name)

🚀 How to Get Started: Take Action Now

We help small business owners just like you make the leap from self-employed to incorporated with confidence.

Our Services Include:

✅ Business Name Search & Incorporation (Federal or Provincial)
✅ CRA Business Number Registration (HST, Payroll, etc.)
✅ Setting up Bookkeeping (Excel, QuickBooks, or full-service)
✅ Corporate Tax Filing (T2) and Tax Planning
✅ Payroll Setup and Support
✅ Free Consultation to Answer Your Questions

💬 Ready to Take the Next Step?

Let’s make this simple. Book a free 15-minute consultation — we’ll walk you through what’s required and give you a fixed price for setup and support.

👉 Register Your Corporation Now
👉 Book a Free Consultation