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We are well experienced in helping the small
businesses toward success.
How
to set up your business
There are three types of businesses: sole proprietorships, partnerships,
and corporations.
Sole
proprietorship
A sole proprietorship is an unincorporated business that is owned by one
person. It's the simplest kind of business structure.
The owner of a sole proprietorship has sole responsibility for making
decisions, receives all the profits, claims all losses, and does not have
separate legal status from the business. If you're a sole proprietor, you
pay personal income tax on all revenue generated by your business. You
also assume all the risk of the business. This risk extends even to your
personal property and assets.
It's easy to set up a sole proprietorship. Simply operate as an
individual or as a registered, unincorporated business. If you operate as
an individual, just bill your customers or clients in your own name. If
you operate under a registered business name, bill your clients and
customers in the business's name. If your business has a name other than
your own, you'll need a separate bank account to process cheques payable
to your business.
Partnership
A partnership is an association or relationship between two or more
individuals, corporations, trusts, or partnerships who join together to
carry on a trade or business.
Each partner contributes money, labour, property, or skills to the
partnership. In return, each partner is entitled to a share of the profits
or losses in the business. The business profits or losses are usually
divided among the partners based on the partnership agreement.
Like a sole proprietorship, a partnership is easy to form. In fact, a
simple verbal agreement is enough to form a partnership. But if money and
property are at stake, you should have a written agreement. The
partnership is bound by the actions of any member of the partnership, as
long as these are within the usual scope of the operations.
Corporation
A corporation is a separate legal entity. It can enter into contracts
and own property in its own name, separately and distinctly from its
owners. As a shareholder of your corporation, you have limited liability.
In the strict sense, this means you and the other shareholders are not
responsible for the corporation's debts.
Since a corporation has a separate legal existence, it has to pay tax on
its income, and therefore must file its own income tax return. You set up
a corporation by filling out an article of incorporation, and filing it
with the appropriate provincial, territorial, or federal authorities.
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How
does your business pay taxes
The way your business is taxed has a lot to do with the way your
business is set up.
Sole
proprietor
A sole proprietor pays taxes by reporting income (or loss) on a personal
income tax and benefit return (T1). The income (or loss) forms part of the
sole proprietor's overall income for the year.
As a sole proprietor, you may have to pay your income tax by instalments.
You may also need to make instalment payments for Canada Pension Plan
contributions on your own income. Remember to budget for these payments.
For more information, consult your accountant.
Partnership
A partnership by itself does not pay income tax on its operating results
and does not file an annual income tax return. Instead, each partner
includes a share of the partnership income or loss on a personal,
corporate, or trust income tax return.
However, for GST/HST purposes, a partnership is considered to be a
separate person and must file a GST/HST return and remit tax where
applicable.
Corporation
A corporation must file a corporation income tax return (T2) within six
months of the end of every taxation year, even if it doesn't owe taxes. It
also has to attach complete financial statements and the necessary
schedules to the T2 return. A corporation pays its taxes in monthly
instalments. Consult your accountant for more details on instalment
payments and the filing requirements for corporations.
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How
to bring personal assets into your
business
You can transfer your personal assets to your business.
If you are operating a sole proprietorship, this is a reasonably simple
process. You can transfer these assets to the business at their fair
market value (FMV). If the FMV at the time of the transfer to the business
is greater than your original purchase price, you must report the
difference as a capital gain on your income tax and benefit return.
For income tax purposes, when you transfer the property to a Canadian
partnership or a Canadian corporation, you may transfer the property to
the partnership or the corporation for an elected amount. This
amount may be different from the FMV, as long as you meet certain
conditions. The elected amount then becomes your proceeds for the property
transferred, as well as the cost of the property to the corporation or
partnership. The rules regarding these transfers of property are technical
in nature. Consult your accountant for more details.
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Buy
an existing business
To become a business owner, you can choose to buy
an existing business, instead of start up a new business.
When you buy an existing business, you generally pay a set amount for
the entire business. In some cases, the sale agreement sets out a price
for each asset, a value for the inventory of the company and, if
applicable, an amount that you can attribute to goodwill.
Another way of buying an existing business is to buy the shares of an
incorporated business. You can ensure the control of the incorporated
business by buying more than 50% of its shares.
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Home-based Businesses
Employment status
It is important to distinguish your employment status because the rules
are different for each situation. Many individuals work out of their home
and are considered self-employed contractors. The onus is on the employer
to treat the relationship properly. The employee usually cannot write-off
as many expenses as the self-employed person.
The next distinction is whether the employee is commissioned or
salaried because a salaried person cannot write-off as many expenses as
the commissioned salesperson.
Home office expenses
The key criteria for writing off a portion of your home is that it must
be be your principal place of business and the work space must be used
exclusively for business. If you are qualified, you can write-off a
portion (square footage used for business divided by total livable area)
of the rent, utilities, minor maintenance, mortgage interest, taxes and
insurance.
If you have a business loss you cannot deduct home office expenses in
that year but can carry it forward to future years.
Vehicle expenses
Your vehicle expenses will often be the largest business expense.
Basically you should keep a log of your business and total kilometers
traveled. Then you can deduct the business portion of all expenses
including fuel, repairs, insurance, leasing cost and CCA (if owned).
Other expenses
The most important thing to remember is to keep your records in a way
that meets your style. You may want to use an easy-to-use software program
such as Simply Accounting. The key is to record expenses promptly.
The best way to remember is to use a credit card or cheque for
everything. Cash expenses have a way of being forgotten very easily.
What's deductible?
The most often asked question is "what can I deduct?"
Generally the expenditure must be "reasonable" and
"incurred for the purpose of gaining or producing income".
That definition can cover a lot of expenses. Some people are aggressive
in their interpretation while others are not. An example was found in a
recent court case where the taxpayer won the right to deduct a trip which
was primarily for business reasons but also included some personal
portion.
It's best to talk to your accountant to find out what will fly and what
will not.
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