How to Convert Sole Proprietorship to Corporation in Ontario

Do you want to start a business as a sole proprietor? It is one of the common ways many entrepreneurs start their business journey in Ontario. It is a quick and affordable process. It requires minimal paperwork. However, as your business grows, so do the limitations and responsibilities. 

When a business begins to grow, many entrepreneurs wonder how to convert a Sole proprietorship to a Corporation in Ontario. You are seeking the best opportunity to expand your business. Converting to a corporation is the best option for your business’s future.

Here is a detailed guide. Will you know the step-by-step process for converting a proprietorship to a corporation in Ontario?

Understand sole proprietorship and Incorporation

As a sole proprietorship in Ontario, you are directly linked to the business. It has simple rules. Furthermore, it comes with risk and tax disadvantages, including.

• It offers unlimited personal liabilities. As the owner, you are personally responsible for your debts, obligations, and lawsuits. 
• As a sole Proprietor, your personal assets, including your car, house, and savings, could be at risk.
• Your income is taxed at the personal marginal rate. The high tax rate is 53.53% in Ontario for high earners.
• It allows you limited growth and business. As banks and investors prefer corporations. Due to their legal structure and credibility.

On the other hand, when converting a Sole Proprietor to a Corporation, you can create a separate corporation under the Ontario Business Corporations Act. This act brings several benefits for you, including

• It gives liability protection for your business debt. It is separate from personal assets.
• Offer tax Deferral opportunities. Like a low small business tax rate.
• By sharing issues, you can achieve easier capital raising. 
• If the ownership changes, the business is still continuous.

Steps to Convert Sole Proprietorship to Corporation in Ontario

There is no single or direct method to convert.  You need to incorporate a new business.  After that, you can transfer your assets and register your accounts.  Here is the process you can follow to convert a Sole proprietorship to Corporation.

1. Federal vs. Provincial Incorporation

You can start by deciding whether to follow Federal or provincial Incorporation.

• Provincial incorporation is governed by the Ontario Business Corporation Act. It is suitable for you if you are operating mainly in Ontario.
• Federal comes under the Canada Business Corporation Act. It gives you the opportunity to provide strong name protection across Canada.  It also required extra provincial registration in Ontario.

2. Name Search

You need to ensure that the desired business name is available for incorporation or not. So it’s important to confirm that your name must be unique. It has not been taken by other book corporations or businesses.

You can use the NUANS report to confirm your Corporation name. It helps you to find out if your business name is already in use or not. If you are operating your business as a sole proprietor, the NUANS search clears it for you, and you may be able to keep it. 

3. File of Incorporation

You can submit your files of Incorporation through the Ontario Business Registry. In this process, you will decide your share structure, whether it can be common shares or preferred shares.  The number of directors is decided, and you can register your office address in Ontario. Government incorporation fees are currently around $360 online (Ontario.ca, 2024).

4. Corporate Records (Minute Book)

After incorporation, you must maintain a Minute Book. This includes your Articles of Incorporation, shareholder and director registers, and minutes of meetings/resolutions. All these are legal requirements under the OBCA. Ontario now allows electronic minute books, but many businesses still hire lawyers or accountants to ensure compliance

5. Register for a Business Number with CRA

Once you register to incorporate a business. Then you need a new CRA business number for the Corporation. For this account, you need corporate income tax, harmonized sales tax, and payroll if you have employees.

6. Transfer Assets & Contracts

You have to transfer your business assets,  bank accounts, and contracts with suppliers or customers from your sole proprietorship to the new Corporation. The transfer of all these assets can be done through a Section 85 rollover with the CRA. This provision allows you to move assets without triggering immediate capital gains tax, provided you file CRA Form T2057. Professional tax advice is strongly recommended before proceeding.

7. Update Licenses and Registrations

It’s important to update your license and permit. If your sole proprietorship held any licenses (for example, a municipal business license or industry-specific permits). Then you’ll need to reapply under the corporate name.

8. Notify Stakeholders

You have to update all the stakeholders about the changes in the business. Send notices and update contracts with clients and suppliers. Finance agreements with the bank should be updated. The payroll of employees is updated under the Corporation.

Costs of Incorporation in Ontario

Here’s a breakdown of the typical costs you know when you convert a Sole Proprietorship to Corporation.

• Government Filing Fee (Ontario): $360 online
• NUANS Report: ~$13 (federal) or ~$30–$75 (Ontario providers)
• Legal/Accounting Fees: $500–$2,000 (varies)

Minute Book & Share Setup: $200–$500

Tax Considerations

Here are the tax considerations you need to know

• Ontario corporations that qualify as Canadian-controlled private corporations (CCPCs) pay a reduced small business tax rate of 12.2% (combined federal and provincial) on the first $500,000 of active business income. This is much lower than the top personal tax rates.
• Corporations can retain profits to reinvest without immediate personal taxation.
• The Incorporation is separate from personal assets to business debts.

Ready to take the next step?

Converting a Sole proprietor to a Corporation in Canada is a major milestone in your business journey. It brings new responsibilities and provides liability and tax advantages for long-term growth.

If you are planning to register a business in Canada. Or want to convert a Sole Proprietor to a Corporation. Having the right guidance is beneficial to save your time and money. At Bestex Canada, our team of expert accountants and business advisors specialises in helping entrepreneurs. To navigate incorporation, tax strategies, and compliance with confidence. 

You will receive personalised advice and step-by-step support. To handle your procedures, we are here to make it possible. Contact Bestax Canada today, and let’s build your business future together.

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Disclaimer: The information provided in this blog is for general informational purposes only. For professional assistance and advice, please contact experts.