Sole Proprietorships 101

For the next few blogs, I will be discussing briefly each of the business structures available to you should you plan to start up your own business.  Let’s first look at Sole Proprietors.

A sole proprietorship is the simplest and most common form of business structure, and it is the oldest form of legal ownership in Canada.  It is owned by one person who retains all of the legal rights and bears all of the responsibilities associated with the business.

The business of a sole proprietorship is not considered as a separate entity from the owner.

The main advantages of sole proprietorships are:

Ø  It is the simplest and least expensive type of organization to create or dissolve. 

Ø  The owner retains absolute control over business decisions.

Ø  A sole proprietor can deduct business losses from other forms of personal income.

Ø  It is simple and inexpensive to maintain.

The main disadvantages of sole proprietorships are:

Ø  The owner faces unlimited liability.

Ø  With regard to liability and taxation, the owner and the business are one in the same.

Ø  You can’t raise funds through sale of Equity.

Ø  Upon death of the owner, the business is legally terminated.

Sole Proprietorships can be formed at any time once you have an idea for business and decide to move forward.  Please contact us if you require more information on business structuring or sole proprietorships.

We’ll look at how Cooperatives work on my next blog! Please check back! 

Passing on a Corporation Part 2

Here is the 2^nd and last part of our blog series on Passing on a Corporation.

One of the main areas to consider when passing on your corporation is the Fair Market Value (FMV) of the business.  All businesses should be transitioned at Fair Market Value at a time that will keep the tax low.  As the business gains ground, acquires more assets and becomes more profitable, the Fair Market Value gets higher.  So the longer you wait to pass on the shares, the more potential tax consequence there may be.  If you know for sure that you are passing on the corporation, and have great trust for the person/people you are passing it on to then why not consider giving them shares while the Fair Market Value is still low.  If they owned 50% of the shares for example, you’d be half way dealt with the issue when the time comes.  You do not have to make them a director just because you give them shares, meaning you could remain in control!  You may even want to give them 49% of the shares, so you keep 51%.  There are an unlimited amount of options here, but regardless of your plan, it is important to have a contractual agreement in place such as a Unanimous Shareholder Agreement (USA).

There are so many variables to look at when determining when to give the shares, how to give the shares and so forth.  A much more effective way to pass on your corporation is to set up a family trust, have the trust own the corporation (all or most of the shares), and then simply hand down control of the trust when the time comes!  This eliminates many of the tax issues you face as the shares would not change hands.  Please read more of my blogs on trusts and structuring to understand more of this.  One other great thing about doing it this way is in the case where you can clearly see things are not going to work you can simply remain in control of the trust and corporation and the shares still remain in the trust (nothing changes)!

Each business succession plan is unique and takes great consideration and planning.  However you will always keep those 4 things in mind when planning the succession: ownership, management, liability and tax.  Ensure you plan early, involve everyone early and really work hard with those involved to make the plan come to reality!  Call or email us to discuss your corporate, business and tax needs, we look forward to hearing from you!

Passing on a Corporation Part 1

You may not want to sell or close your corporation or maybe your goal is to pass it on to someone such as your children, other family members, relatives or even friends.  If this is the case you are better to start the plan as early as possible.  You may not implement the plan until a later date, but it is imperative to have a plan.  When talking about passing on the corporation, we are really talking about passing on the shares, which is the ownership of the corporation.  When you have ownership of a private corporation you typically have control (directorship), which means you control the assets and the business of the corporation.  Because this is included in Estate Planning we are can break it down to 4 areas we are looking at in business succession: ownership, management, liability and taxes!

First and foremost, if you are planning on passing your corporation on to someone or some people such as your children, ensure that they really want to do it and that they have a passion for the product or service the business is selling. Also ensure they are capable of running the business and that they lead a lifestyle that can work with the business.  You don’t want them to take over the business and then either get bored with it, run it into the ground, or change it into something you would never approve of if you still owned it!  The sooner you get them involved in the business, the sooner you will see the reality of the possibility of passing on the business to them!  You may also want to give them incentives towards ownership while working there, and/or you may even want them to have some type of monetary contribution.  If they have to put in work and/or monetary contribution they are much more committed then if they were just handed the opportunity on a silver platter!

We’ll continue this blog series on Friday. Please visit us again!

Business Basics: What records do I need to keep?

Here is the 2^nd part of our blog series:

If you are carrying on a business of any size, be it a sole proprietorship or a large corporation, you must keep record of all documents that provide the ability to calculate payable taxes. Your records must be supported by “source documents” in order to corroborate the amounts in these records, often known as “books.” Source documents may include things such as sales invoices, receipts for purchases, deposit slips, cheques and contracts. A recent article by TaxTips does a great job of outlining some of the must-knows regarding business financial records, so we decided to summarize their article for you on our blog.

For income tax purposes, all your financial records and corresponding source documents must be retained for a minimum of six years after the end of the last tax year for which they pertain. In the case of capital purchases, this can be slightly more complicated because the last tax year to which they relate is probably much later than the actual date of acquisition. If the capital property is disposed, purchase records are still required to calculate the gain or loss at the time of this disposal. Therefore, records pertaining to capital properly should be kept until six years after the capital property was disposed, sold etc. This may be many years after the initial date of purchase.

There are some records that the business of a person (not a corporation) that must be retained for six years after the tax year that the business ceased or ended. These include:

• The general ledger containing the summaries of the year-to-year transactions of the business
• Any contracts or agreements that are necessary to understand the entries in this book
The records that a corporation must keep until the business is dissolved include:

• Minutes of the meetings of directors of a corporation
• Minutes of the meetings of the shareholders of the corporation
• Records of the corporation that contain details regarding the ownership of the shares of capital stock and any transfers of such stock, the GL or other book containing the summaries of the year-to-year transactions of the corporation
• Any special contracts or agreements that are necessary to understand the entries in this book

Article source: http://taxtips.ca/smallbusiness/booksandrecords.htm

About Kustom Design Group

Kustom Design is a group of interconnected companies, each company striving for the same goal: to provide excellent Accounting and Financial products and services to help clients SAVE on taxes, properly manage their finances and ultimately, achieve Financial Freedom and Lasting Wealth.

The Kustom Design Group offers a complete line of products and services in key areas of accounting, finance and tax; from accounting, consulting and strategic planning to financial and tax education. Visit our website for more information about our products and services http://www.kustomdesign.ca/.

Contact Us: http://www.kustomdesign.ca/ | Calgary, AB | (403) 219-0602