Business Start-up Guide: Steps after incorporation!

Congratulations, you have decided to take a difficult and bold decision to start your business which opens the doors for potential big rewards. Of course, rewards come with some risks that employed individuals don’t face.

For the purpose of this article, we have assumed that you have already decided the right business structure for your new business. However, here is the summary of the most common business structure options:

1. Sole proprietorship: it is the most basic and simple way of doing business. A sole proprietor files business return along with his personal tax return using form T2125. The owner is personally liable for all liabilities of the business. Sole proprietorship makes business continuity, transfer of ownership difficult and offers limited tax planning opportunities.
2. Partnership: in this structure, two or more persons join hands to form a business. The pros and cons of partnership are typically the same as of the proprietorship, so we will not discuss them separately.
3. Corporation: it is generally recommended way of doing business. It is a separate legal entity from you. It can own assets, money and insurance. It can enter into a contract of its own.  This structure offers protection against personal liabilities and offers various tax planning opportunities.

We have discussed various advantages of incorporation in our article Advantages Of Incorporation.

 

Who will be your shareholders? Voting and non-voting shareholders / family members:

This question comes if you have opted for the corporation as your business structure. Will you invite friends or family members as a shareholder? Perhaps you will be the only shareholder of the corporation to start with. Under a corporation you can issue different classes of shares which can have different rights such as the right to guaranteed dividends (generally referred to as preferred shares).  You can also select which shareholders will be controlling the decision-making of the corporation by issuing voting and non-voting shares. 

Registering your business with CRA and other government agencies:

a) Business Number (BN):

BN allows CRA to identify a business (like SIN number for individuals), basically it is a tax ID. It is based on the concept of one BN throughout Canada. You need this number if you have a corporation or you need a program account like HST or payroll.

BN consists of nine digits followed by program identifier and reference number. Example:

          123456789-RC-0001

Busine Number        = 123456789

Program Identifier  =  RC

Reference Number =  0001

b) HST Number:

Any business with sales (taxable supplies) of $30,000 or more in a last four consecutive quarter must register with CRA. If you have sales below this benchmark, you can still voluntarily register for HST number.  In most cases it is beneficial to register for HST as you can claim refund of the GST/HST paid on your business expense, called Input Tax Credit (ITC).  Depending upon your sales volume and HST payable, your filing frequency will be determined. First nine digits of HST number will be the same as BN number, however, it will end with RT0001.

c) Payroll Account:

If the corporation (or proprietorship) will be hiring employees (including yourself) it must open a payroll account with the CRA. This will track the payroll labilities (deduction from the salary of employees and employer’s portion of salary taxes). The first nine digits of HST number will be the same as BN number, however, it will end with RP0001. Based on your payroll size, CRA will determine the remittance frequency, but for small business normally it is monthly remittance.

d) Employee Health Tax (EHT):

If your business’s payroll exceeds $450,000 per annum, you must also register for EHT. Instead of CRA, EHT is administered through the Ontario Provincial government.

e) Workplace Safety and Insurance Board (WSIB), Ontario:

If your business hires an employee, you must register with the WSIB. The WSIB, a no-fault collective liability insurance, provides worker coverage for loss of earnings, health care and support return to work after injury or illness. This means a worker can get workplace safety and insurance benefits without proving that their employer was to blame for their injury or disease. The employer must pay the monthly premium as set by the WSIB board.

Insurance, License and Trademarks:

In most cases you would need a license to operate in your industry. Like doctors, lawyers, CPAs need license from their respective regulatory bodies before they can start providing services. Also, in most professions, you would need a liability insurance to cover you and third party from a possible claim. Please make sure to check with your profession’s regulatory body if one exists.

If you have invented or created a new product, design, or business concept, it is a good idea to register a trademark/patent to protect it from competitors taking advantage of it.

Open Business’s bank account:

All business must open a bank account whether it is a corporation, sole proprietorship, or other form of business. Banks normally require the article of incorporation or Master business license to open the account. It is also good idea to get a business credit card, if approved by the bank.

Hiring staff: Employees vs contractor?

Another critical step is hiring people to work for you and deciding on what will be their legal relationship with your business i.e. employee vs contractor.

A contractor (or self-employed) is basically operating as business and engaging in a business relationship with the payer. While an employee enters a contract of “employment”. Normally, an employee works for a single employer and the employer dictates and controls the work performed and how they do it as well as the hours and location of work.

For business,  onboarding a contractor is preferred way of hiring because this means a lot less paperwork and responsibility. To pay a contractor, a company writes a cheque at the agreed rate and the processed is done. For an employee, the business needs to run payroll which requires correct processing of salary payable, holding and timely remitting income taxes, Canada Pension Plan (CPP) and EI payment. Employees may also qualify for health coverage, life insurance, pension, vacations, and other benefits.

Hiring contractors also gives a business much more flexibility in its labor cost as business goes up and down. Typically, a contractor works for various “clients” and has a temporary nature of relationship while an employee is engaged in long-term relationship which can result in loyalty and long-term better performance.

The employer must issue T4 and T4 Summary return to each employee and CRA at year-end.  

Critically important is to note that the employer is responsible to clearly assess whether it is hiring a contractor or an employee. An employer who fails to deduct the required CPP contributions or EI premiums must pay both the employer’s and the employee’s share of contributions, premiums owing, plus penalties and interest.

Accounting, bookkeeping and Taxes:

No business can survive without proper bookkeeping and accounting. Unless you know what revenue, income, expenses are or what is payable, receivable and cashflow, you can’t manage a business.   Many businesses fail in long run, even though it is able to generate sales volume, because they don’t know and understand their financial numbers. Maintaining books of account with accuracy, timeliness and consistently is a must, not a choice.

A corporation needs to file an annual income tax return (T2). In case of proprietorship, business return will be part of your personal income tax return (T1) which would include form T2125.

Business would also need to file HST/GST, T4 and T4 Summary for payroll account, EHT and WSIB returns.  

If you have the time and expertise of accounting, you still need to purchase an accounting software like QuickBooks Desktop or QuickBooks Online etc. If you lack this expertise or want to focus your time on your business, it is advisable to hire an accountant.

In addition to bookkeeping and mechanical filing of returns, in most cases, you will also need a professional advice of a Chartered Professional Account on different accounting and tax issues. In most cases, you will need this advice from time to time, not just on a year end basis. A qualified and experience accountant can develop an optimal tax planning strategy. These strategies and compliance can help you achieve long-term financial goals, avoid tax problems and result in potentially large savings.  

If you need any help with startup of your business, registration with CRA, establishing and maintaining your books of accounts, tax filing, and etc., please call for free consultation. Our professional team at Source Accounting Professional Corporation, CPA, is ready to guide and help you. Call for free initial consultation.

If you have any questions or any other tax and accounting issues, please feel free to reach out to Source Accounting. Source Accounting is an accounting firm in Mississauga, dedicated to small and medium size business, providing tax, accounting, bookkeeping, payroll solutions and etc. And if you find this post helpful, please let us know in your comments.

Disclaimer: The above contents are provided for the general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice; nor can it or should it be relied upon. Please contact / consult a qualified tax professional specific to your case.