So you want to start your own business. That’s great; you’re joining the thousands of people willing to take a risk on their million-dollar idea. You have everything planned from staff, to interior design, to marketing. However, there are tax- considerations and financial questions you should take into account. From developing a viable business plan to how you should structure your business: we’re here to help you succeed.
Many new entrepreneurs think about talking to an accountant at year end because it’s time to file a tax return, but a quick conversation early on can help set your business on the right path from the start.
First you should ask yourself these questions:
- What is the best way to structure my business?
- Sole proprietorship;
- Incorporated (federally or provincially);
- Partnership.
- What is the best way to finance my business?
- Do you have some savings you can dip into?
- Bring on a partner; give away a bit of equity?
- Take out a business loan?
- Is my business plan viable? Consider things like:
- Start-up and operating costs;
- Debt repayment;
- Drawing a salary (if and when you should);
- When the business will become profitable.
And even before you start operating:
- What are my GST/HST and other tax obligations?
- Income tax filing;
- GST/HST reporting;
- Tax deductions and credits, and more.
- How should I structure my payroll?
- Employees or contractors
- Salary or hourly;
- CPP, EI and tax deductions;
- Remittance deadlines;
- Internal software or outsource.
Business Structure and Related Implications
After you’ve completed your due diligence and had your business plan looked over by a chartered professional accountant, your next step should be determining how you want to legally form your business.
- Sole proprietorship: this is one with the least amount of fuss. No extra tax filings and potentially not even a new bank account. As the sole owner you do not rely on anybody else to make any financial decisions. A sole proprietorship also means that you assume all the business risks personally outside of any insurance coverage.
- Partnership: you have someone you think would be a great business partner. You make sound decisions, work well together and handle disagreements in a healthy manner. Each of you contributes money, skills, time, and/or effort equally. Specific partnerships are subject to tax filing requirements – usually governed by a legally binding written agreement. Partners can be individuals or corporations.
- Incorporating: allows the owner to remove some of the risk. By incorporating you transfer money or property into the corporation in exchange for shares. Corporations are a separate legal entity and may provide you with a limitation of personal liability (unlike a sole proprietorship).
Businesses often start as proprietorship’s or partnerships and then transition to corporations – sometimes after several years. Each structure has its own set of benefits and drawbacks. It is best to understand all three options before making a decision.
Financing the Business
Most businesses start with an investment from the owner(s). This is typically in the form of a loan taken from personal savings, a line of credit or other cash resources. Quite often, the initial years are tough and business owners look to bring in partners. If the partner comes with complementary talents, this can be a valuable addition to the business and at the same time, provide a cash injection. If the partner is really just a lender, then consideration should be given as to whether they should be a partner or simply a lender. Bringing in partners normally means giving away some equity. Acquiring funding by providing equity is often the most expensive form of financing over the long term, but can also be the option that allows the business to get to the next level.
If you have used up your cash resources and partners are not in the cards, a loan may get you what you need. Traditional bank loans are one option, and many banks offer the Canada Small Business Financing Program which will often provide loans for new/start-up businesses.
You often hear about the high failure rates of new businesses. One of the biggest downfalls for a start-up business is financing. Without enough funds to make it through the initial start-up phase and early growth phases, any business will struggle to make it.
The Business Plan
Numerous blog posts already exist on Business Plans. The key is to have realistic expectations. Do your homework on your SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis. A higher ratio of Weaknesses and Threats to Strengths and Opportunities may require you to revisit your plan. The financial analysis piece of the business plan will be integral to helping you understand the overall viability.
When will I be profitable?
When will I begin to start drawing a salary?
How soon can I start paying back the family that helped me get started?
These are all key questions to answer in your plan. These answers can also help you obtain financing from partners and banks when the time is right.
Tax Obligations
Income Taxes
You often hear that only two things in life are certain . . . Death and Taxes. The CRA is like a business partner you didn’t ask for but are stuck with. The best way to handle them is to stay off their radar. You do that by knowing what your requirements and obligations are, and staying on top of them.
Businesses have to pay income taxes on their profits; however, the reporting is specific to your business structure.
Proprietors report earnings on their personal tax returns, while partners report their share of the partnership’s profit or loss on their tax returns. Corporations have to file separate corporate tax returns. Regardless of how you structure your business you will still be subject to report any income earned.
Filing deadlines also vary based on your business structure. A proprietorship has to report by June 15th each year, but any taxes owing are still due April 30th. A corporation has to pay its taxes within 2 or 3 months of its year end, but it has to file the tax return within 6 months. And if all of that was not complicated enough: partnerships have returns to file but only for information purposes, the partners (whether individuals or corporations) have to report the income based on their reporting deadlines.
Operating through a corporation can permit some tax deferral and greater control over the timing of personal tax.
GST/HST Filing
Step one is to determine whether or not you have to register. The general rule of thumb is that if your business’ total revenue exceeds $30,000 in either a single calendar quarter or in the last four consecutive calendar quarters, then you are required to register. Despite the above threshold, there are certain industries that are considered exempt and are not required to register.
Once you register, you are required to collect GST on your sales. If your business is registered be sure that your invoices properly disclose your business’ name, total amount paid/payable, date of invoice, and GST number. This same information needs to be on every invoice you pay.
When GST/HST began, businesses became tax collectors. In effect, you hold funds in trust for the government and on a periodic basis; you are required to remit those funds to them though you do get to deduct the GST that you pay from what you send in. Along with the remittance, a GST/HST return needs to be filed.
The rules can be complex and so talking to your accountant in advance will help make sure you get this right from day one.
Tax deductions and credits
Perhaps the most misunderstood business comment is, “don’t worry, it’s a write off.” The concept of a “write off” is simply that an expense is deducted from revenue to arrive at profits and profits are what the business pays tax on. The misconception is that the write off is fully recovered in the form of tax savings. That couldn’t be further from the truth. The savings is simply the tax. At a 12% corporate income tax rate, spending $100 can results in a $12 savings. It’s never a good idea to only spend money because there is a tax deduction involved.
Business owners spend money on things to assist the business to make money. Those things might be rent, or equipment, salaries, or advertising and everything in between. They key is to understand that while a tax deduction may exist for business expenses, the savings are a small portion of the overall expense.
Payroll
Employees vs contractors, hourly wages vs salaried employees, part-time vs full time; the list of decisions is endless. CRA has rules governing employees vs contractors and the provinces dictate things like minimum wage, vacation pay, overtime pay and more. No matter which way you go, there is a lot to stay on top of.
You may have decided whether to engage contractors, employees, or both but you will also need to determine the number of people you will need to ensure smooth operations.
As an employer you are required to withhold CPP, EI, and income tax for your employees – add the employer portion of CPP and EI, and remit it all to CRA before certain deadlines. A missed or late payment comes with interest and penalty charges. However, for contractors the same rules do not apply; you pay their invoices like any other supplier.
Bookkeeping
As a business owner, you need to make informed and timely decisions. In order to do that effectively, you need information. Many new business owners manage from the bank account. It’s easy to think that “if there is cash in the bank, I must be doing ok.” Unfortunately, cash doesn’t help you understand who owes you money or who you owe money to. It doesn’t help you understand what part of your business is profitable and what isn’t. Cash is king, but a king in a kingdom without generals, assistance, and other help can do very little.
Every business needs to keep track of assets, liabilities, revenues and expenses. Without proper financial information it’s difficult to know if your prices are right, costs are too high, bills are overdue, or if someone hasn’t paid you yet. Whether you use an online system, desktop software or a simple spreadsheet, timely financial information is essential to a successful business. There are certain reports that every business owner should review – at least monthly and, perhaps, even more often.
If you’re unsure what steps to take, lack the time, the confidence or the desire, KBH offers an outsourced accounting service with different features and customizations that can handle your GST, payroll and bookkeeping – we also are able to specifically tailor the solution to your business.
So, what next?
There are numerous considerations when starting your own business. Take advantage of a free 30 minutes consultation with one of our professionals to get you off on the right foot.