Alberta is a province that is ripe with potential for small business owners to build their companies and their future. As a province, we have a higher than average family income than the rest of Canadians, sitting at $100,750 per household compared to $78,870 per household, the national average (source: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil108a-eng.htm). This additional household income means more flexibility regarding saved capital for starting a small business but can also mean a larger discrepancy between your take-home pay as an employee and what you can expect to earn in the early years as a small business owner.
When you are trying to plan for your future, it is imperative to consider your financial well-being and earning potential, both in the short term and in the long term. How can you know how much to invest in real estate, stock portfolios or ancillary spending if you do not have any idea of how much your earning potential will be?
If you are considering starting your own small business, evaluating the realities of your earning potential is not only a smart business decision, it is an important life-planning decision. At Kent Accounting, we help prospective business owners thoroughly evaluate the potential of their business and, not only assist them in deciding if starting a business is the right decision, but help them map out a plan for financial success.
What is the earning potential of owning your own business?
It is no secret that in the early days of your small business, you might struggle with consistent client acquisition and cash flow. The average new small business takes 3 – 5 years to “get off the ground,” and often entrepreneurs work for “free” for the first 1 – 2 years, before they begin to take home a regular pay cheque. While there are certainly some startups that do well right out of the gate (such as restaurants or other franchises), your household income might fluctuate from where it was before you started your small business. As an individual, the best way to balance this out in both the short and long term is through tax deductions.
The tax benefits of being a small business owner are much greater than that of an employee. Income tax is the single largest expenditure a person will make in their life (even more than their home!). When a business earns $100 in income, it pays roughly $13 in tax and, therefore, keeps $87 dollars to either reinvest into the company or to pay out as dividends. When an employee earns $100, they pay roughly $35 in tax and keep $65 to invest (please note, there are numerous assumptions being made here). As you can see, the after-tax profits are $22 higher for the business vs the employee in the example given. Simply put, a business can earn more after tax than an employee. As you build your business, bear in mind that a smart small business accountant will help you understand all the tax deductions available to you as a small business owner, as well as how to take advantage of those after-tax profits.
But we haven’t even gotten to the best part yet. In addition to receiving better tax rates throughout your earning years, when it’s time to retire you can sell your small business. When an employee retires, they typically get nothing extra from the company; they simply stop working. The cash injection from a small business sale in the later years of one’s life can prove very beneficial in funding an enjoyable retirement. Furthermore, if you are selling a Canadian small business you can receive up to $835,716 tax free (note: there are many restrictions on what qualifies; ensure you seek a qualified small business accountant). In my opinion, this is the single best tax deduction available to Canadians; you should take advantage of it!
Keeping accurate, detailed financial records is critical for future sales potential – at Kent Accounting, we are happy to help you map out a record keeping plan that, if kept up to date, will save you hours of work and headaches if you choose to sell your business at some point in time.
So what should you do with those after-tax profits? To maximize the growth potential of your income, we recommend flipping that income to a secondary venture and allowing it to grow alongside your business, increasing your cash flow and earning potential. Feel free to connect with us at Kent Accounting to talk about what those new ventures could be and whether taking a passive or active role is best for you.
Disclaimer: tax rules change frequently and can depend on your individual circumstances. The above is not to be relied upon as tax advice and is meant for information purposes only. Please consult a tax professional.