Written by Dayna Holland with the help of Elizabeth Mah
You have a great business idea and you want to start making money from this business venture. But how do you do that? Is it as easy as sending out an email to friends and family to let them know that you are open for business? Posting a notice on Facebook, Twitter, or Instagram? The answer is YES! It’s that easy. But then you start selling or providing a service and people pay you for it. Now what?
The first thing to know is that there are a number of options available to you. You can operate as a Sole Proprietor, a Partnership, a Joint Venture, or as a Corporation. I’ve comprised a brief overview of these structures below.
If you don’t incorporate your business, and it’s just you working in the business, you are likely operating as a sole proprietor. This is an unincorporated business. You should register your sole proprietorship name with your provincial registry. This ensures that no one else has a similar name to you. In British Columbia, check out this link to make sure your sole proprietorship name is not taken.
For accounting purposes, it is best to have a separate bank account to help you track the inflows and outflows of cash for your business. It helps keep your personal expenses out of the business. And it makes it much easier at tax time to prepare your tax return.
From a tax point of view, operating as a sole proprietor is an extension of you. Everything that you earn and spend for the business is taxed as a part of your personal income. So at the end of December 31st, any profits you’ve made will be taxed in the tax return that you file with the CRA the following April. If you have losses in the first year or so of your business, that loss can be used against your future income. Just remember as well, that if you have revenues of more than $30,000, you will likely need to register for GST/HST purposes. And if you are selling a product, you will likely need to register for PST too. As a sole proprietor, you can have employees. If you do, then ensure that you are making the proper payroll tax remittances.
Partnership and Joint Venture
Partnerships and Joint Ventures are a bit of a hybrid business structure. It is still an unincorporated entity, but they each have an agreement among the people involved as to how to allocate revenues and expenses. However, a Partnership can involve more than two partners, whereas a joint venture will involve just 2 parties. A Partnership is a legally recognized entity, but a Joint Venture is not. A joint venture is not a stand-alone entity. This is why a Partnership will need to be registered with the province (see link above), but a Joint Venture does not need to be registered. There are also different types of Partnerships (General Partnership, Limited Partnership, Limited Liability Partnership, etc.). But I’m not going to go into detail on this. If you are interested in learning more about Partnerships and the pros and cons of each, my recommendation would be to reach out to your lawyer or accountant to have them walk you through these options.
With anything that involves someone other than yourself, you should have a contract/agreement in place. Even if it is just something that sets out general terms and understanding of how you and your partner want to operate the business. However, one of the most important parts is to make sure you have a “what happens if one partner wants to leave” contingency. It’s always easiest to have this conversation when things are new and everyone is happy.
For accounting purposes, there should be separate accounting records maintained for the partnership and the joint venture. All of the parties involved should have some level of oversight into the financials to make sure that they are in agreement with how the accounting is supposed to be tracked. Regular meetings should be kept in order to review the financials.
For tax purposes, a Partnership will need to file a partnership return (unless both partners are individuals), but a joint venture does not have to file a separate joint venture tax return. And generally speaking, most Partnerships will have a December 31st year-end. Partnerships will also need to register for GST if their revenues are greater than $30,000 and they will need to register for PST if they are selling tangible items. If they have employees, the Partnership will also need to make the proper remittances.
Joint Ventures don’t really have a year-end period since they are not legal entities, nor are they registered for GST or payroll purposes. Any sales or employees are part of a specific party to the Joint Venture and it is the responsibility of each of the JV Parties to ensure that they are tax compliant.
Incorporating a business can be the most complex and costly structure out of all of the options to start a business. Mainly due to the costs involved to set it up properly, the annual compliance costs, and the time involved to maintain it. So if you are looking at incorporating, make sure you understand why you are incorporating and that you have enough revenues to support the incorporation.
Corporations are separate legal entities from yourself. You will need to follow your province’s requirements to create a corporation. If you’re in British Columbia, here is the link to make sure you understand what’s required to set up a corporation.
The biggest recommendation that I can provide to you is, that if you are looking to create a corporation, is to spend the money to get a Lawyer to assist you. There are so many times when I’ve needed to have my clients work with lawyers to clean up their corporate records. In some cases, clients haven’t issued themselves shares from their company. And without shares, your company doesn’t really exist. In other situations, the share structure doesn’t allow for flexibility in the payment of dividends (a tax planning strategy). And in one situation, the company had been delinquent in filing their annual reports with the Province and was close to having the Province dissolve their business due to non-compliance. All of this is much more expensive and time-consuming to do after incorporation. So it is best to invest in getting it done correctly the first time.
As a business owner, one of the hardest transitions that I’ve seen clients struggle with is that their incorporated business is separate from theirs. This means that all of the money coming in and out of the company does not belong to them as an individual. It belongs to the company. The company is considered to be an individual for legal and tax purposes. This means that as a business owner, you can’t withdraw funds out of the company without it being salary, dividends or a shareholder loan (side note: shareholder loans can have negative tax impacts, so reach out to your accountant to discuss what you need to do). This also means that you shouldn’t be making personal purchases on a corporate credit card (but I know that sometimes it happens – just don’t do it all the time). And if you do, this will need to be tracked and is going to be treated as additional compensation to you.
A corporation will need to file its own Corporation Tax Return, file GST and PST, and make payroll remittances, similar to a sole proprietor or a Partnership. One difference though is that a Corporation is not confined to a Calendar year-end. It can have a year-end at any time during the year. This is helpful if you have a seasonal business. For instance, if you are a retailer, your busiest month is likely December. As a result of this, many retailers will have a January or even a February year-end. This allows them a bit of breathing room to gather and recover from a busy period. However, once you have set your fiscal year-end, you are expected to stick with it. You can request a change, but you need to have a really good reason in order to do so. And it does take time to get that approval from the CRA. So take your time in determining what your year-end should be.
Starting up a business is fun and exciting, but it can also be a bit overwhelming, so take the time to learn about what the best business structure will be for you.
Special thanks for this blog article goes out to Elizabeth Mah, Lawyer and Founder of Paperclip Law (www.papercliplaw.com; firstname.lastname@example.org). She contributed her time and words to make sure that my legal terminology was correct and to draw on her experience with her clients.
Dayna Holland, CPA, CA (she/her)
CEO of Dayna Holland Ltd.
Are you a small business owner or self-employed and want to improve your bookkeeping habits so that you can get ahead for the new year? Be sure to check out this blog post for my top three recommendations based on conversations I’ve had this year with entrepreneurs.
Click here to learn more about Dayna Holland, CPA, CA.