Starting a Business?
IMPORTANT: This post is specific to Canada. If you are not a Canada business/taxpayer then it is probably not applicable to you.
Wonderful – welcome to the excitement of owning your own business. If you’re still in the early stages of starting your business here are some things you might want to do early:
Incorporate a Company
There are several advantages of trading as a Corporation rather than a Sole Proprietor. These include:
- Ability to defer tax or pay a reduced rate on amounts not distributed to you
- Ability to share income (limitations do apply) with family members
- Increased ability to deduct insurance premiums
- Limited Liability protection for owners
- Balance date does not have to be December 31
A lot of people start a business as a Sole Proprietor but with the intention of incorporating at some stage. However the process of going from a Sole Proprietor to a Corporation is not always straight forward due to the Capital Gains rules. It can cost (in some cases) several thousand dollars in professional accounting and legal advice to do this “rollover” properly to avoid/defer capital gains taxes. We recommend incorporating as early as possible – preferably before you start the business. Incorporating is not expensive and only takes a few days. There are some increased compliance costs (tax returns) and government forms but if your business is more than a part time hobby then it is worth it.
Register for GST/HST
If you have earned $30,ooo over the previous 12 months then you need to register for GST. But in many cases you should not wait until you have hit that threshold. Registering for HST earlier will allow you to claim back more of the GST you pay on your expenses which can be significant if you are acquiring capital assets or building up inventory. Also, if you register late you can only back-date your registration in certain circumstances. It’s a good idea to talk to an accountant early!
Get Revenue Quick
The Income Tax Act will deny a deduction for business exploration or startup costs in cases where there was no revenue. It is a good idea to get SOME revenue as quickly as possible to establish that you actually have a business. If you spend 6 months “getting ready” you may find that none of those up-front expenses can be deducted.
Open a business bank account
Even if you are a Sole Proprietor you should ALWAYS open a separate bank account for the business. I also recommend opening a separate credit card (or use a debit card on the business account) for the business. All business transactions should go in and out of the business accounts. AVOID paying business expenses from your personal account and NEVER deposit business money directly into your personal account. Your accountant will thank you and it may just keep you out of hot water with CRA!
Stay up to date with your bookkeeping
You have a legal obligation to maintain accurate books and records. Failure to do this can cause huge amounts of frustration later when the tax man comes calling or decides to audit you. Start early with a good accounting system that will serve you in the long run. Don’t be mislead by the free online system. These are often not proper accounting packages and you will probably outgrow them. Invoicing systems can be useful, but don’t replace your accounting system. In this day and age we avoid desktop software – why be bound to one device and one user when there is so many great options available online these days. We recommend Xero as our online accounting platform of choice and are experts at supporting it.
Another strong plea: enter transactions and balance your bank account at least MONTHLY. If doing bookkeeping is your way of getting to sleep at night then get an accountant or bookkeeper to help you early. Please don’t wait until Feb (for Dec year-ends) to start doing last year’s accounting work.
Get a good accountant
Yes, a little self-interested here, but it’s worth engaging an accountant early. Don’t wait until tax returns are looming! Your accountant can help you incorporate your business and give you advice on tax planning, GST, expenses deductions, setting up accounting software, payroll issues, and general business matters and growth. Many accountants also offer monthly bookkeeping services to help you stay on top of things (we do).
For an appointment to talk to us, call (647) 367-0876.