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Starting Your Small Business (Part 1 of 4)

Do you think it’s time to strike out on your own and start your small business? It’s one thing to have an idea, and it’s another thing to put that plan into motion and start your business. For most entrepreneurs, taking the first steps to creating your business can be one of the most challenging processes along the way. Read the top questions we ask individuals when they are considering starting their small business.


1. What Kind Of Business Are You Starting?

The very first step you take before you start your small business is to decide how committed you are to it.  Are you prepared to quit your full time job and devote your full time attention to it?  If you want to start slowly (and that’s ok!) and work on your business part-time, it really changes the commentary that follows. Assuming you’re going to make this business your full time job, one of the first things you’ll need to decide is how you are going to structure it. Should you incorporate your small business or start off as a sole proprietor? Click here to read a thorough explanation of the pros and cons being a sole proprietor or incorporating as a small business. Do you still have questions? Contact Kent Accounting for a one-on-one consultation, to make sure you start your new venture on the right foot.

2. Getting Off the Ground

What Are You Willing To Risk: When I first started my business, it was humbling to reach into my personal bank account, withdraw $50,000… and then spend it on cards, furniture, website, etc.  You’d be amazed at how fast $50,000 disappears when starting a business. More than once I had thought about the other things I could have purchased with that money. Furthermore, most businesses require anywhere from $150k – $300k of startup funding to pay for key equipment, leasehold improvements and other necessary business items.  If you’re going to borrow that money from a bank, they will want a personal guarantee (i.e. they take everything you have, including your home, if you don’t pay them back). Are you certain you’re willing to risk it all? Be certain before you move forward.

Do you need additional investors for capital to get started? If you do, you’ll need a well-written contract or agreement in place before you accept funds, and you’ll want a solid plan for accountability regarding how you’ll use those resources. Kent Accounting can make sure you maximize the investments your partners are making. Talk to us today about how to organize the financial aspects of your business plan.

Business Development: Every business owner is first and foremost a salesperson. Can you sell your product/service? Do you know who will buy your product/service? Sales and marketing should be covered in detail in your business plan, which is discussed more in the next point. I separate it here to draw attention to the importance of clients. A business is nothing without its clients.

Write a Business Plan: There are a million clichés about why having a plan makes sense, but I’ll keep it simpler than that — any business that I have come across that was struggling had no actionable business plan. While a plan in and of itself doesn’t guarantee success, it is my opinion that the absence of a plan dramatically increases your odds of failure and/or creating a business you don’t actually want. The latter is the more concerning; I have met many entrepreneurs who work 60+ hours a week in their business and they are not happy with what they get out of the business (i.e. crappy clients, poor pay, etc). Furthermore, they are trapped in their business due to large debts that have personal guarantees attached to them. I will be writing a separate blog on what to put into your business plan.

Quality Control: How can you ensure you are delivering the services you are offering in a timely and professional manner? How can you ensure that the services you’re offering are the high standard you’re setting for yourself? What hiccups or roadblocks can you foresee in accomplishing that?

Customer Service: Who’s doing the basics, like answering the phone calls, responding to emails and checking the mail each day? These might seem like small parts of your daily routine, but once your business gets off the ground and you start getting busier, these customer service jobs might get lost in the bustle. Be sure you have a team member in place from the start to handle your incoming inquiries and basic day-to-day operations. For more information on how to set up your small business, contact Kent Accounting.

What Kind Of Licensing Do You Need: Your business could need a municipal, provincial, or federal license (or all three). For example, if you’re looking to provide health and beauty services, care for children, or serve food, a municipal license is a must. Spend time researching and understanding if your business requires specific licenses, certifications or permits to operate.

Liability Insurance: Keep your assets and property safe from any potential damages or obligations that could occur from your business. If there is an accident, or someone gets hurt on your jobsite, liability insurance will help keep your business and personal assets protected.

If you read the above and feel a little overwhelmed, then you’re in good company. I think that any entrepreneur who is being honest would tell you that starting a business is not easy and involves a great amount of uncertainty. That said, it is also one of the most rewarding experiences a person can experience. At Kent Accounting, we help folks get going and operate highly successful businesses. Would you like to chat? We offer everyone a free hour of time, so give us a call and we’ll help you any way we can.

 


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

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Starting Your Business – Federal Tax Accounts

If you are considering starting your own business, now is certainly an exciting time to be joining the hundreds of thousands of Canadians who are currently business owners. One of the first steps is deciding how you want to run your business and understanding the accounts you’ll need to set up. Today’s blog will cover a few important choices you’re going to have to make!


Deciding on a Legal Structure

Before we begin discussing tax accounts, you’ll need to choose a legal structure for your business; make sure to get properly informed on the various options. There are many ways to structure your business — the two most common are as a sole proprietor or as an incorporated business.

Sole Proprietor: As a sole proprietor, you are your business, from a tax point of view. Business income/expenses are reported on your personal income tax return; there is no ability to defer income tax. If your company loses money, those losses can typically be used as deductions against your other sources of income (i.e. you get a tax refund). Note that there are rules to follow here, so make sure you know what they are. (The rules are too lengthy to describe here.)

Incorporated business: As an incorporated business, you and your business are two separate legal entities. This results in a variety of distinctions, two of the most important ones being that you have to file a separate tax return for the company, and that you add a legal buffer between you and the work your company does. As your business earns money, you may leave money in the business or take the additional funds as salary or a dividend. (See our blog on dividends vs. salary.) Any business losses remain in the company to offset future earnings, but if you never earn a profit, these losses are ‘trapped’ in the company.

Business Number

Your next crucial step is an easy one. Regardless of whether you choose to operate as a sole proprietor or as an incorporated entity, you will need a Business Number (which operates like a social insurance number for your business). You can get one easily by phoning the CRA (1.800.959.5525). Make sure you have your business name, address, nature of your business, account types (which we will discuss below), phone number and Articles of Incorporation (if applicable) in front of you before you call. Want to double check you have everything you need before you call the CRA? Set up a time with Kent Accounting so we can ensure you’re completely prepared.

GST Account

Almost every business requires a GST number, although there are a few exceptions. Unfortunately, the rules are quite complicated so it’s hard to give simple pointers here — you’ll need to either read the rules or contact a professional. To find out whether your business needs a GST number, call Kent Accounting and book a consultation. As a rule of thumb, you are required to collect GST once your business makes $30,000 worth of sales in a single year, and since many new business operators don’t know how much they will make or when, it is best practice to register for a GST number as soon as you begin operations. At the time of this blog post, Alberta has GST and not PST/HST. However, other provinces have PST and HST; if you plan to sell in other provinces, ensure you understand the rules on collecting and remitting. Like any federal tax, GST returns must be filed annually. Filing deadlines depend on when you register for your GST number and what revenue volume you anticipate. If you fail to file your return and make the GST payment on time, it will cost you interest and penalties.

Corporate Income Tax Account

This applies to those small business owners who have decided to incorporate their business. As you’ll be filing a separate annual tax return for your business, it will need its own income tax number, and these taxes must be filed both provincially and federally. Your corporate income taxes are due within six months of your fiscal year end, and a failure to file and pay can flag you for an audit.

Payroll Tax Account

Issuing payroll cheques has taxation requirements, starting with registering for a payroll account. Registering for your payroll account (or closing your payroll account) is as simple as contacting the CRA, and we suggest registering before you hire any employees, so it is ready to go when you start bringing on staff.

A word of caution: be organized with payroll. If you don’t know what you’re doing, STOP and either read the rules or contact a professional. The CRA is very punitive with payroll errors and/or late remittances; it is common to incur financial penalties as a result. One point we cannot stress enough is to not to be late with your remittance — payroll withholdings are the CRA’s money, and they want it in a timely fashion. Remittances are generally due on the 15th of the month, following the payroll payment. If your payroll exceeds certain thresholds, the remitting frequency will be accelerated. The first time you are late with a payment, it’s a 10% penalty. The second offense is a 20% penalty. If your payment is due on the 15th and you make it on the 16th, it’s considered late, and the CRA will not ‘give you a break.’ Finally, payroll accounts require that you issue T4s to all your staff. If payroll seems overwhelming, contact Kent Accounting to find out more about our payroll services.

Import/Export Account

If your business includes importing and exporting goods across the border, then you’ll need to set up an Import/Export Account. If you are planning on using a customs broker, you might not need an Import/Export Account. Not all goods are allowed into Canada, so make sure you determine their eligibility before putting significant efforts into your business. And finally, there are duties and tariffs associated with importing and exporting goods — know the tariffs and duties before you get started. Failure to adequately consider these costs in your pricing could cause real challenges.


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

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Paying Yourself: Salaries vs. Dividends – Part Two

The Pros and Cons of Salaries

Today’s blog is the second of a two part series on paying yourself as a Small Business Owner — should you pay yourself a salary or in dividends?

In part one of this two-part blog, I examined the benefits and drawbacks of compensating yourself with a salary; this second analysis will provide a breakdown of dividends. Click here to read part one!


So what are the ins-and-outs when, as a small business owner, you decide to pay yourself via dividend?  Here are some of the pro’s:

It’s simple: when you need money, just write yourself a cheque.  There are no source deductions to make and no reports to send to the government.

Lowest tax in the short term: with dividends, you do not pay into the Canadian Pension Plan (CPP). CPP contributions in 2017 are $2,564 for the employee and an additional $2,564 matched by your employer (i.e. your company), so your annual tax savings here is $5,128…a nice little weekend get away!

Depending on how you think about CPP, this can be a good thing or a bad thing. Generally speaking, if you don’t pay into the CPP program, you don’t get any pay outs once you retire. Some folks think that CPP won’t be around when they retire in 30 years, so they don’t want to pay into it.  Our opinion is that CPP is here to stay and provides a good safety net if your business unexpectedly fails.  Paying $5,128 per year into an investment portfolio for 45 years (the average working life of a person) and then being entitled to receive roughly $1,200 per month until you pass away is a very reasonable return on your investment.  Are you sure that you can do better than this investing the money yourself?  Not paying CCP premiums is the primary reason that the tax rate differs between salaries and dividends.  When CPP is ignored, the tax rate is nearly equivalent between salaries vs. dividends.

You can pay inactive persons: income splitting is a powerful tax management strategy.  Currently, you can pay shareholders (i.e. your spouse, your brother, anyone that owns shares in your company) a dividend even if they don’t provide any services to your company.  This allows you to direct income to lower income earning people and save a significant amount of tax.  Note, our liberal government is currently working to end this benefit.

Flexibility: we can easily change how much income we declare to you by having you repay any excess monies you withdrew from the company.  This can be helpful to manage your income tax rate in any given year.

There is always a downside. Here are some of the cons associated with dividends:

Surprise tax bills: depending on how much you withdraw from the company, you may have a tax bill the following April.  Your taxes could be as little as 0% or as high as 50%…it all depends on how much you withdraw.  MAKE SURE you talk with a qualified accountant before withdrawing more than $50,000 from your business.  Clients and accountants both hate surprise tax bills.

RRSP’s: you will not have access to the RRSP program.  RRSP’s are super important…in our opinion they are one of the best tax deductions available. We wrote a whole blog just on them for that reason (read it here).

Higher tax rate in the long term: generally speaking, you will end up paying more tax in the long run if you utilize dividends consistently over your lifetime, primarily due to the RRSP component described above. Please note that this depends on your personal tax circumstances and is not a universal truth.

Summing it all up, we generally take a mixed approach to the salary vs. dividend question.  This way we get the benefits from both salaries and dividends, while minimizing the downside.  While we would love to give you some specific instructions here, the “right” answer for you really depends on how much money you’re going to need over the long term from your business. Are you wondering what the best combination is for you? We offer everyone a free hour to discuss any questions that you may have. Contact us here.


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.

Kent Greaves 1 Comment

Paying Yourself: Salaries vs. Dividends – Part One

The Pros and Cons of Salaries

Today’s blog is the first of a two part series on paying yourself as a Small Business Owner — should you pay yourself a salary or in dividends?

You’ve started your own business and you’re finally starting to make some money — your suppliers and staff are being paid, as well as your bills, which means it’s time to take some money out for yourself. So, is there a difference between the money you earned while working for someone else and the money you’ll earn working for yourself? Not really — but there is a difference in how you collect that money. Today we’re talking about the pros and cons of taking a salary as a small business owner.

In terms of how often you get paid, there is no difference at all! Set yourself up to receive a pay cheque as often as your other employees do (for simplicity’s sake) such as bi-weekly, monthly or perhaps quarterly.

When it comes to writing the cheque, what’s easier? With a salary, you will have to manage payroll, which can be time-consuming and for many small business owners, a little overwhelming. Talk to Kent Accounting about our Payroll Service Bundles and take one more thing off your to-do list. As for overall money management, when paying yourself is a part of your monthly rhythm, it’s a lot easier to control and monitor how much you’re spending and how often you’re taking money out, as opposed to those who take money out of their business ad hoc.

In the short-term, taking a salary will mean you will pay a slightly higher tax rate. You’ll pay CPP (Canadian Pension Plan) and income tax off of every cheque (generally speaking, business owners and their immediate family members are exempt from EI). As a small business owner, remember not to be late with remitting your source deductions to the CRA, as there are penalties every time you are late (10% the first time you’re late, 20% the second time you’re late).  To avoid remittance penalties, contact Kent Accounting and let us manage your payroll services and your source deductions.


However, salaries give you some great tax advantages in the long-term — namely, the right to receive a pension when you retire and access to RRSP room.

CPP: by contributing to CPP, you gain eligibility to receive CPP payments starting as early as age 60. While the payout amount varies from person to person, many Canadians over 60 years receive approximately $1,200 per month. CPP is a savings safety net that ensures all Canadians can have a comfortable retirement.

RRSP:  salary also allows you room to contribute to your RRSPs (up to 18% of your calculated total yearly salary) with a maximum, in 2016, of $26,010.  When you contribute to an RRSP, you get a refund on any tax paid on the income you earned.  Many of our clients receive 30% or more back for each $1 they contribute… so a $10,000 RRSP contribution could get you a $3,000 refund. That refund would pay for a nice vacation for you!

Note that the refund amount depends on your total income for the year. Further, investments in an RRSP grow tax-free. Not sure what that means in terms of dollars and cents? It’s such an important topic I wrote a separate blog about it (click here to read it). RRSPs are considered by many to be the best tax deduction available to Canadians.

There are some rigid rules to salaries that can’t be discounted. With salaries, you can only provide pay cheques to people who have provided services for your company, so your salary is yours alone. Also, once you’ve reported your total salary to the CRA, there’s almost no flexibility in changing how much you earned for any given year, and that lack of flexibility can be challenging for some.

We strongly encourage you to discuss your remuneration with a qualified small business accountant.  Want to talk to us about it?  Contact us here.

 


Disclaimer: Tax and legal rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as legal nor tax advice and is meant for information purposes only. Please consult a legal and/or tax professional.