How should small business owners set up their finances when starting a business?
Pandemic-weary Canadians who plan to start a new business in the New Year, whether it’s a sideline or a complete career change, should know there is a lot going on. to prepare.
Whether it’s incorporating or collecting sales tax, there are many decisions a new entrepreneur will need to make up front to avoid financial mishaps.
Shadi McIsaac, CEO of Ownr, a company of RBC Ventures, said one of the first steps for an entrepreneur is to decide on the structure of their business: usually as a sole proprietorship or as a corporation. . She said there are pros and cons to each approach.
“One of the biggest differences when you incorporate your business is no longer just an extension of your job,” Ms. McIsaac said. “It actually becomes its own separate legal entity. “
Some of the benefits of incorporating include the ease of raising capital from investors and financial institutions and doing business with the government. It is also easier to transfer business ownership, for example during a sale, or with estate and estate planning.
A sole proprietorship can be less complicated if the entrepreneur works alone and is responsible for all facets of the business. Being a sole proprietor also means not having to pay the sometimes costly fees, including the services of a lawyer, that can accompany starting a business, although some newer services, such as Ownr, can help guide entrepreneurs. throughout the process at lower cost.
Steve Bridge, a certified financial planner at Money Coaches Canada, said new small business owners shouldn’t feel rushed to incorporate. He said he had seen many clients get on board too early.
“There is no benefit for most people when they are starting out,” he said. “Unless you’re in an industry or profession where there is a good chance of being sued or serious liability issues, then there isn’t a huge benefit. “
Mr Bridge said most small business owners should consider incorporating once they find they are making a lot more money than it takes to operate. At this point, he said, there may be tax advantages to keeping money in a corporation.
Taxes are a big deal when starting a new business and come in two main forms: sales tax and income tax.
Sales tax is the easiest to follow. New businesses only need to collect GST or HST if they earn more than $ 30,000 in consecutive 12 months. Once this threshold is reached, a small business will then need to start collecting sales tax from customers. Rates vary by province and when this money is due to be turned over to the government depends on the size of the business. Most small businesses will only have to remit once per fiscal year.
Liz Schieck, a certified financial planner at the New School of Finance, recommends opening a separate sales tax bank account in order to keep track of it.
“Every time you get paid by a customer, you take that HST off… and you put it in that account and you don’t touch it,” Ms. Schieck said.
The amount to save for income tax is a bit trickier and depends on income projections. Ms Schieck said she advises clients to exercise caution in assuming a tax bracket at least as high as the one they are currently in. Then, like the amount collected for sales tax, put a percentage of each paycheck into that account.
“It’s nicer to come in at the end of the year and have more money in tax savings than you owe, rather than the other way around,” Ms. Schieck said. “But it’s very unpleasant if it’s the other way around.
Ms Schieck said one of the most common financial pitfalls she sees in new entrepreneurs is under-invoicing their services, which is important for both their business planning and the planning of their finances. personal.
“It’s really tough, especially when you’re just starting out you don’t want to be the dearest person,” she said. “You want to develop your clientele. But it can be very difficult to increase your prices later if you are working with repeat customers.
Another big stumbling block for a new business can be tracking cash flow. This includes monitoring the payment of invoices and payable expenses, in order to ensure the solvency of the company.
“It’s the most boring part, but it’s the most important part,” said Mr. Bridge.
He recommended that new business owners track the inflow and outflow of money using spreadsheets, with many templates widely available online. For entrepreneurs who need help, they might consider hiring an accountant or using an online service like FreshBooks.
One of the most important steps in protecting cash flow is starting a business with a large financial cushion. Financial planners generally recommend having enough cash on hand to pay for three to six months of fixed expenses.
“Six months is ideal, but it can take a while to achieve this goal,” said Ms. Schieck.
Are you a young Canadian with money in mind? To prepare for success and avoid costly mistakes, listen to our Podcast on stress testing.