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Starting your Own Business:  Tips to Success

First and foremost, congratulations on taking the leap to running your own business! This is a very exciting time and it is a glorious ride!

The following issues will be discussed in this post:

  1. Types of business structures,

  2. Business plans,

  3. Cash flow and financing,

  4. Staffing, and

  5. Taxes.

As a start-up, defined as a business that has been in operation for less than three years, you are joining the ranks of 2.4 million business in Canada! Over 53% of start-ups in Canada are run by part-time entrepreneurs, and many of these are started with seed money of $5,000 or less! You are not alone!

1. Type of Business Structures

We have all heard of the terms Sole Proprietorship, Partnership, and Corporation.

How are these different and Why are these distinctions important?

A. Sole Proprietorship

This is the simplest and least costly way to start.You can use your own name and existing bank account!There are no legal fees, other than registering your name and applying for a business license in your local jurisdiction.In BC, this will cost less than $100.

All income and expenses will run through your personal income tax return (T1 return) at the end of the year.For simplicity, your tax year end will be December 31st.Other dates *can* be chosen, but increases the complexity of tax reporting because you must “accrue” your income to December 31st anyways.

In addition, if you have a business loss, this will be applied against any other income that you earn, such as a salary from employment, to reduce your overall tax liability.

The downside to Sole Proprietorship?If your business is sued, your personal assets are on the line.

B. Partnership

A partnership is “a relationship between persons who are carrying on business in common with a view to profit.”This can be between individuals (T1 return), corporations (T2 return), trusts (T3 return), or other partnerships.

While partnerships can be formed verbally, a formal written contract (ie. Partnership Agreement) is strongly recommended.

All income and losses are flowed out to the partners, who report their share of the partnership income on their tax returns.The partnership itself does not file an “income tax return”; however, certain partnerships are required to file an information return (the T5013 return).

C. Corporation

A corporation is a separate and distinct legal entity from its shareholders and is identified with one of the following after its name:Corporation (Corp.) , Incorporated (Inc.), Limited (Ltd.).

It is more costly to set up and maintain.Incorporation can be done within your province of business or federally, if you plan to operate throughout Canada.While these can be done online for around $200, getting the advice of a tax professional and/or lawyer is recommended to ensure that your business is set up in the most tax advantageous way.

On-going costs would include annual legal filings and bookkeeping and accounting costs.While the latter costs are required for all three business types, the method of taking money out of the corporation (being salary or dividends) is more complicated and therefore, incurs higher accounting fees.In addition, the corporation must file its own income tax return (the T2 return) every year within six months of the year end.

Advantages of a corporate structure include a “corporate veil” that helps to protect your personal assets from your business assets in the event that the business is sued.You can choose any date for the corporate year end, often to coincide with your off-season when you have more time.Finally, there may be tax advantages because the basic small business rate in BC is 13% for 2017 (12.5% for 2018).

2. The Business Plan

A business plan helps clarify whether the business is viable. It forces you to research your idea:

  • Who are your competitors?

  • Will potential customers buy what you are selling?

  • Is your pricing competitive? </