So you want to start a small business. Awesome! We are here for you, obviously, as that’s our thing. Likely you’re not really thinking of yourself as a “small business owner” so much as “self-employed” or “freelance” or maybe a “solopreneur” if you’re feeling fancy. Regardless of what you call it, if you’re in business and you’re not an employee, it’s time to start thinking of yourself as a small business owner.
To avoid accounting headaches down the line, you will want to start by deciding what kind of business you are going to be. The exact nature of each option will vary based on your location (you will want to do some location-specific research and maybe even talk to a lawyer if you’re not sure what to do), but your main options are proprietorship, partnership, or corporation.
A Proprietorship/Sole Proprietorship is essentially the “default” option. Outside of any permits/licenses that may be required in your area for specific types of businesses, this does not even require any paperwork – you simply start doing business (do note, however, the date that you begin business activities, as you will report this on your taxes later). You will need to track your expenses and income and report these on your taxes as well.
- No cost to establish
- All income by the company must be filed on your personal tax return, and individuals generally pay higher taxes than corporations do
- More at stake if things go bad; you personally can end up on the hook with creditors in case of bankruptcy
- Don’t choose this option if you’re going into business with someone else.
A Partnership is more appropriate if you are going into business with somebody else (or even a group of people). To make sure you and your partner are both protected and feel your arrangement is fair, it is best to involve an attorney and get everything in writing. Essentially this will function the same as a sole proprietorship, except that you are “sharing” the business. Laws pertaining to partnerships in particular might vary a lot based on the province or state in which you live, so legal help is highly recommended.
- Having a partner can be great in a lot of ways, especially if you personally cannot afford the start-up costs of your business on your own
- Can be a legal headache to create your partnership agreement
- The same personal liability problem as with a sole proprietorship, except both you and your partner(s) can be liable for business debts
Your other main option is to form a Corporation. Unlike the previous two options, a corporation is a legal entity truly separate from yourself – even if you’re the only stakeholder. This one involves the most paperwork. In Canada, you can incorporate either on a provincial or federal level. You will need to file a list of directors on your board (this might just be yourself, or you can involve others) as well as elect officers to run the business (this might be you electing yourself, but it still needs to happen). You will also need to file a tax return for the corporation every year. Shares can be issued to multiple people, making this a good choice for a business you are starting up with partner(s). There is some additional cost and paperwork if you want your corporation to have a specific name rather than just be a numbered corporation “operating as” your chosen name. This is to ensure there’s no other corporation in your area (province/state or country if incorporating federally) with an identical name.
- There can be tax benefits: for instance, if your business does extraordinarily well one year, you can leave some of that capital in the business and have the corporation pay tax on it, while taking only what you need as a salary and avoid paying personal income tax on the rest.
- More protection for you, as the corporation going bankrupt may have less of an effect on your personal finances and assets. However, you should not assume you are not going to be liable for decisions and business practices you make as an officer/director of your corporation, as this is not bulletproof. Consult an attorney if you are unsure.
- Good option if you are going into business with partner(s)
- Higher costs to get started; expect to spend $250-$1000 to incorporate your business
- More paperwork in general: you will need to file a separate tax return and likely other reports on corporate activities annually. Using an accountant is likely good idea for any of these, but especially for a corporation.
- If you are taking money out of the corporation for yourself (which you must, if you want an income from your business) as dividends rather than salary, you may end up paying tax on it both as the corporation and as the individual. Talk to an accountant in your area to ensure you’re making the most of your business profits with your structure.
Remember – the specifics of each business structure can vary greatly in different jurisdictions, so do your homework and consult an attorney or other professional adviser before choosing one. Hope this overview helps you get started with the business of your dreams!