Many Canadians are intrigued by the idea of being their own boss

Many Canadians are intrigued by the idea of being their own boss.  Starting your own business is an exciting concept but setting it up can be complicated, and there’s no one resource that has all the answers.  Today we’ll begin to tackle the biggest questions the new business owner will generally ask. 

One of the first and most important decisions you’ll need to make is how exactly you’ll structure your business. 

Sole Proprietor

You can choose to be a sole proprietor of your business and, as such, any profit you make would be taxed on your personal tax return.  The advantage here is simplicity. This is the easiest kind of business to structure. It can literally be as simple as getting business cards, perhaps registering a trade name, opening up a separate bank account, and that’s it.  But essentially, it’s you carrying on the business.  

The downside is that you personally assume all the risks of the business. So if you get sued in the course of your business, your personal property and assets are at risk.  Additionally, you also have a potentially higher tax rate if your business starts to make a lot of money. For example, if your business reaches earnings of $250,000, every additional dollar above that will be taxed at a rate of 53%.

Corporation

When you incorporate your business, you create a separate legal entity and your profits are taxed at a different rate – a flat tax rate.  In Ontario, for example, that rate is 13%. So if you’re earning significant income from this business, there’s a very powerful advantage to doing business as a corporation.  Your profit would be taxed at 13% versus where it would be if you were doing it as an individual, a sole proprietor.

In theory, a corporation also provides some liability protection.  This means you’re less likely to be personally responsible for the corporation’s debts, which offers some protection for your personal property and assets, although there are circumstances where this won’t be the case.

The real downside of the corporate structure is its complexity and that most people will require help with it, advisors, managers accountants.  That means much higher set up and maintenance costs.  

You can certainly start out as a sole proprietor then decide to incorporate later, but be aware that it becomes more complicated and expensive than if you had incorporated from day one.  So it’s a good idea to give some extra thought to your direction and make your best decision from the outset.

What Can I Deduct?

Whether you’re incorporated or a proprietorship, new business owners always want to know, “Now that I own my own business, what can I deduct as an expense?” There’s a misconception that the income tax act contains a big list of what is deductible and what’s not.  That’s not really the case. The overriding principle is if you have an expense and you can make a connection between that expense and the business, then it’s deductible. Once you’re earning a business income (as opposed to employment income), there’s a bigger pool of deductions available to you.  As long as you can reasonably connect an expense to your business, it will be deductible, no matter which business structure you’ve chosen.

So that’s a general outline of the key things, out of the gate, that a new business owner will be trying to figure out.  We get into much more detail on this specific topic in Episode 3 of The Vaive and Associates Tax Podcast, hosted by Rolland Vaive.  We hope you’ll listen in and hear more about this very interesting subject.  It could save you a lot of money.

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