The Transition from Employed to Self Employed Part 2

We’ll pick up where we left off on my previous blog where we started our discussion on the first option for the transition from employed to self employed.

As we mentioned already, a gradual transition is when you continue to work while starting your business on the side.  The bad thing about a gradual transition is that it will now be like having 2 jobs, where you will work days, nights and weekends.  The workload will be much more, and as the business grows you will get to a point where you feel that you can’t manage both the job and the business.  When it comes to that point, it is time to look at the full transition to self employed!

The second option to make the transition from employed to self employed is to do an instant transition.  This means that as soon as you cease to be employed, you are going full time into your business!  The issue with using this method is that you will no longer have the steady paycheck of employment, so if your business is struggling to make enough income at the beginning, you and your family could be affected by having little to no income for a period of time.  The key to making an instant transition is to either have capital in reserve, have a spouse that can cover your closed circle budget, or to have business arranged that will generate enough income to run your business immediately and provide for you personally!  In looking at the option of gradual transition and instant transition, you may want to look at a combination of the two.  For example you may want to change the employment from full time to part time for a period of time until you are ready to fully leave the employment.  There are many options to look at, and all of the details revolve around planning.  If you are considering a transition, don’t hesitate to come see us to assist in planning your transition!

We’ll discuss the 3^rd option on my next blog. 

Professional Corporations 101

A professional corporation is a corporation engaged in providing professional services, where a profession governed by its professional body allows its members to practice through a corporation as opposed to a sole proprietorship or partnership.  Examples include Doctors, Dentists, Chiropractors, Lawyers and Accountants.  To have a Professional Corporation you must belong to a professional governing body.

The main advantages of professional corporations are:

Ø  Having a Professional Corp. allows you to belong to Professional Organizations.

Ø  Having a Professional Corp. allows you to be recognized as a Professional.

Ø  Many people like to deal with Professionals that are governed by another body for accountability.

The main disadvantages of professional corporations are:

Ø  There are more tax filing and other rules for a Professional Corporation than a regular Corporation.

Ø  A Professional Corp’s life is ended if the person/people holding the designation passes away or loses their license.

Ø  You are under the rules of the Prof. Organization that may not allow you to have shareholders or partners that don’t belong to the organization. (hold credentials).  Typically the exemption to this is immediate family members, such as a spouse or children.

Ø  The articles of incorporation, in addition to all other requirements, must limit the activities of the corporation to the profession.

If you belong to a professional governing body they may require you to have a professional corporation.  Please contact us if you require more information on business structuring or professional corporations.

The last part of the series on structures will be about Charities. Check back next week and we’ll discuss some general information about these organizations!

JOINT VENTRURES 101

A joint venture is not a structure, but is really a contract.  A joint venture exists when two or more people agree to contribute goods, services, labor or capital to one business enterprise. Canada has no specific laws governing joint ventures, outside of contract law.  Currently, joint ventures are governed by the contract between the parties involved in the jurisdiction they are agreed to be governed by.

The main advantages of using joint ventures are:

Ø  You can make up the rules as to what the joint venture contract will look like.

Ø  Joint Ventures are very flexible.

Ø  Joint Ventures bring people together to share resources and/or talents.

Ø  Joint Ventures can simply end when the deal is done (unlike a partnership or corporation).

The main disadvantages of using joint ventures are:

Ø  Contracts can be complicated and costly.

Ø  The objectives of the Joint Venture may not be clear, or each JV partner may have different objectives that cause conflict.

Ø  Legal Contracts come down to interpretation, and in Joint Ventures there are no major laws governing them.

Joint ventures can be used in conjunction with corporations, trusts and other types of structuring.  If you have structuring questions, don’t hesitate to contact us!

On my next blog, we’ll discuss Limited Partnerships. Please check back on Thursday! 

Cooperatives 101

A cooperative is generally described as a business that is organized, owned and democratically controlled by the people who use its products and services, and whose earnings are distributed on the basis of use of the cooperative rather than level of investment.  A distinct feature of a cooperative organization is that the role of owners and patrons / users are closely connected.

The main advantages of Cooperatives are:

Ø  Cooperatives have many of the same advantages of investor-owned corporations such as limited liability of owners and perpetual existence of the cooperative.

Ø  Cooperatives are allowed to deduct patronage refunds to members out of before-tax income.

Ø  Control of the business can be kept in the hands of those who use the business.

Ø  Profit distribution may be allocated in shares or cash.

The main disadvantages of Cooperatives are:

Ø  It may be difficult to raise funds for a Cooperative.

Ø  Cooperatives may not provide incentives for members to contribute additional capital.

Ø  Extensive Record Keeping and more complex tax and registrations filing is required.

Ø  Longer decision making process with more possibility of conflict between members.

Cooperatives are used much less than corporations and trusts, however they do have their place.  Cooperatives are very typically large businesses.  If you have questions on structuring your business or investments don’t hesitate to contact us.

On my next blog, we’ll take a look at Holding Companies.  

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!

Selling your corporation or your business Part 2

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

When selling your business you should look at your valuation and see if your asking price fits in the range of similar businesses being bought and sold on the market.  With the advancement of the internet, it is very easy to search businesses for sale that are similar to yours to see if you are in the ball park asking price.   The asking price may or may not be Fair Market Value and that is up to you. However, the closer it is to Fair Market Value (or less), the easier the corporation/business will be to sell.  If someone just wants to purchase the assets and not the shares, then your tax consequences are higher so you may want them to pay more.  Alternatively, you could give a discount on the sale price if they were to buy the shares vs. the assets.  At the end of the day, it is a sale between you and someone else and whatever price and method you come to agreement with is your decision! 

However, if you are going to sell the business at Arm’s Length, such as to another Corporation owned by you and/or family members, to a trust, or to a family member, then you must sell/transfer it at Fair Market Value to the Arm’s Length party.  Fair Market Value is just a fancy word to determine what it is worth if you sold it on the market today! 

Another thing to mention here is that when you sell your business, it is best to close your current business number with CRA and let the new business owner open a new one.  This would include GST, Payroll, Corporate Tax, and Import/Export accounts you have open.  Along that same line, the minute book must be updated through the sale according to the business sale/purchase contract details.  You may want to keep your minute book and have the new business owner create a new one. 

One more topic to discuss in selling your business is to remember that you can get creative in your deal.  For example, the buyer could give you part cash and part other assets, such as Real Estate, Vehicles, other businesses or anything else that may be of value to you.  Also, if the purchaser does not have all the funds to purchase the business at the agreed price, and they can’t get financing, you could finance the balance of the sale over a set period of time.  These are just a couple examples of getting creative and the ideas could go on and on.  Remember though, it is always best to seek professional advice in doing any business purchases, sales or transfers.  We are here to help so don’t hesitate to contact us!

Working with your Corporation Part 8: Vehicle Expenses

When running your business you may require a vehicle to travel back and forth from offices or workplaces, pick up supplies, meet with clients and much more.  Vehicle expenses are a very typical deduction for most businesses.  Vehicle expenses may be reported in 2 ways: by mileage or by actual cost of vehicle expenses.  If you own the vehicle personally you should keep a mileage log to determine the amount of kilometers you traveled for business and then the company could reimburse you the prescribed rate per kilometer.  Because these prescribed mileage rates change it is good to inquire as to the current rates for reimbursement of mileage.  If the company owns the vehicle and you are using it for personal use then a mileage log must be kept for this method as well to determine which portion of the vehicle expenses are for business versus what is for personal.  The same rules apply whether you own or lease the vehicle.

Notes on vehicle ownership: It is important to differentiate who owns the vehicle, you or the company.  To determine this we must look at who the bill of sale is to (who purchased the vehicle).  Insurance should also be in the name of the owner of the vehicle.  Remember that you can sell a vehicle to the company, however this should be done at Fair Market Value and using an actual bill of sale.

Notes on keeping a mileage log:  It is important to keep a separate log for each vehicle which is driven for both business and personal.  The log should record the date of each business trip, destination, reason for the trip and the kilometres driven.  Also, make sure to record the odometer reading at the beginning and end of each year to determine the total kilometres driven in the fiscal year.  If you have a smart phone, such as an Iphone or Blackberry you can get a tracking app that can even work with your phone’s GPS for ease of tracking. 

Once you have maintained a log for a full 12-month period, the CRA has indicated that they would “afford considerable weight” to a log maintained for a “sample period” as evidence of the business use for a full year, if it meets the required criteria. 

If you want to avoid a mileage log you need to have a vehicle that is used for personal and a different vehicle that is used for business.

Working with your Corporation Part 7: Accounts Payable & Receivable

In this 7^th part of our blog series on working with your corporation, we will discuss some important things you would need to know about managing your Accounts Payable and Accounts Receivable.

                                                                         

Accounts Payable

Accounts payable is simple, but you do need a tracking system and a filing system.  If you are only going to have a small amount of payables, you do not require a digital tracking system, just a way to ensure your bills are paid on time.  If you have larger amounts of regular accounts payable, you will need a digital tracking system such as Quick Books or other software.  .

Important Note on Accounts Payable: Always do your best to keep current with all vendors to ensure good relationship and good credit.  Whatever your terms are, pay them by the due date.  Also, remember that when you have extended credit terms, such as net 30, you can utilize this credit and pay just before or on the due date and maximize your cash flow!

Accounts Receivable

If your business gets paid when the job gets done, or you are selling a product without credit terms then you may not ever have any Accounts Receivable.  However, most business do end up with some accounts receivable.  Have a way to track your accounts receivable and always collect as soon as possible. Do not let people that owe you money drift off.  Contact them and/or send them statements regularly if need be and ensure you get paid!

Important Note on Accounts Receivable: Uncollected Receivables have closed businesses due to lack of cash flow.  Make it a priority in your business to collect all revenue as soon as possible!

In our next post, part 8 of our blog series, we will discuss Vehicle Operations in detail.  You will know what constitutes vehicle ownership as well as how to keep a mileage log. 

Working with your Corporation Part 5: Paying for Expenses

This is part 5 of our blog series, “Working with your Corporation.”   Let’s now look into how you can pay for expenses.

Paying for Expenses

You will typically pay for expenses in 1 of 4 ways:

a.      Cash

b.      Cheque

c.      Debit Card

d.      Credit Card

Here is a basic rule to follow: IF YOU PAY FOR AN EXPENSE, ALWAYS GET A RECEIPT OR INVOICE.  You probably say, “I have record of the expense on my bank/credit card statement”.  Yes, statements are extremely important for bookkeeping and accurate records. However, statements MAY NOT withstand a CRA audit as they require receipts and invoices with details.

*Important Note for paying expenses: Always pay for Business Expenses from the business, and pay for personal expenses personally.  This is extremely important for bookkeeping, accounting and CRA reporting.  Keeping your business and personal expenses paid separately and properly will not only ensure accurate records, it will also save you money on your bookkeeping and Corporate Year End!  Keep it simple. You should have a business Debit and/or Credit Card and a personal Debit and/or Credit Card in your wallet and when you are paying for things ensure you use the correct card by determining if it is a business or personal expense you are paying for.

If you cannot get a business credit card, just get a sub account on your personal credit card account that you can use to pay for businesses expenses, keeping the record separate from personal.  Your bank can give you a separate credit card with a sub account that can be tracked separately on your statements.  Always let your business pay for its own expenses even when the company does not have the funds to pay.  In this case, personally write a cheque or transfer funds to the company and let the business pay for the expense.  Remember, this is a shareholder loan!  In the case of multiple owners, you may want to use reimbursement sheets so expenses can be approved by all partners.  

Working with your Corporation Part 1: Introduction

In our last blogs, we discussed the steps to incorporation.  Once you are incorporated, now what?  Now, it is time to run business, and there are some key things that you want to have in place.  At this point, you should have your corporation registered, your bank accounts set up and any required licensing registered.  Over the next few blogs, we will discuss some of the keys things you should know in working with your corporation.  We will talk about how you can keep up with your financial tracking and reporting, how you can pay yourself, how you can pay for your expenses and other important topics that will help you get on the right foot in working with your corporation.

Hopefully in your business plan, you’ve considered what things you can do yourself and what you will have to hire out.  The following are the key areas of the business that you must look at: Management, Marketing, Sales, Financial & Accounting, Customer Service, I.T. and Administration.

Right from the beginning of your business, you must have a plan to ensure you have a way to track the finances of the business, including Cash Flow, budget monitoring, Accounts Receivable and Accounts Payable.  Since you have a Corporation, proper and regular bookkeeping must be done in accounting software such as Quick Books. This could be you the business owner doing it, a bookkeeper or an accounting firm such as Kustom Design Professional Services Corp. This is different than a Sole Proprietorship where you can simply get away with adding up your income and expenses at the end of the year (although regular tracking is still recommended for Sole Proprietorships).  You must also have a plan for reporting to CRA and the Provincial authority on time each year. 

We will continue our blog series on “Working with your Corporation” in my next post.  Please check back for some helpful pointers on bookkeeping and GST remitting. 

Steps to Incorporation, Part 1

We’ve been discussing Corporations in great depth over this blog series and many are asking “How do I start a Corporation?”  This is what we will cover in this blog series: Steps to Incorporation.  As always, this is just a guideline and you should always consult with your professional to ensure you are taking all the steps you need to for your corporation as each corporation and business is unique.

The first step, once you’ve decided to incorporate, is to determine if the corporation is to be a Federal Corporation or a Provincial Corporation.  This really depends on where you will be conducting your business from.  If you are just operating within a province then of course you just need to incorporate in that province.  However, if you want to conduct business in multiple Provincial Jurisdictions then you may want to look at the possibility of setting up a Federal Corporation (Charter).  If you are just operating in a couple or a few provinces you can incorporate in your province and then file for extra provincial registrations for the other province(s) you will conduct business in (instead of incorporating Federally).  Having too many extra provincial registrations can become cumbersome, so if you are conducting business in many provinces then you should definitely look at a federal corporation.   Keep in mind here that when we talk about conducting business in more than one province, we are not just talking about having a few clients or customers that purchase your product or service outside of your province.  When we talk about conducting business we are talking about where you are actually doing the business.  For example you may have offices in multiple provinces, or you may travel back and forth regularly to do business in other provinces.  This is completely different from just having some out of province clients or customers.  If you only have a few out of province clients or customers, then you do not need to extra provincially register, nor would you need a federal corporation.

We’ll continue our blog series on Steps to Incorporation next week!

Structuring your Corporation part 3

Another question that comes up often is “should I make my kids a shareholder of the corporation?”  Although there could be benefits of making your kids a shareholder, it is a very serious consideration and you must look at the potential issues you may face in doing so.  The main reasons why people want to make their kids a shareholder are, first, to give part of the ownership to the kids giving them a sense of ownership and potential option to be able to pass on the business to them easier.  Second is for income split using dividends.  To receive dividends they will be 18 years of age, and if you make them a different class of shareholder they can receive dividends in the amount you choose each year (based on profit).  The main potential issue that you have to consider here is how well you know your son(s) or daughter(s), how well you will know them in the future, and how well you know their spouse(s) or future spouse(s).  Kids do go estranged and sometimes marry a spouse that could cause potential issues.  What I’m saying here is you have to consider who these owners (shareholders) and their spouses will be in the future as they may have a say in your corporation!

To get around this issue and to look at further structuring efficiently, we begin to look at trusts and holding companies.  We will not go too deep into these here in this blog, but please do look for my other blogs on trusts that go more in depth!  By setting up a trust that owns the corporation’s shares you can income split to all the beneficiaries of the trust at whatever percent you want without any of the beneficiaries becoming an owner of the corporation!  Having a trust own your corporation not only benefits you with ultimate splitting of dividends, but could also allow you greater benefit if you ever sell the shares of the corporation and much more!  Add a holding company into the structure by having the holding company owned fully by the trust, and in turn having the holding company owning some shares of your operating company.  This allows for you to issue tax free dividends to the holding company.  Once these dividends are issued into the holding company tax free you can do what you like with them, including holding on to them until a later date, lending them out, or paying dividends to your trust and ultimately the beneficiaries (you and your family)!

Again we are just covering some basic guidelines, tips and strategies that are very effective.  There are unlimited options and possibilities when it comes to structuring so please don’t hesitate to email us or give us a call!

When to Incorporate? Part 2

Here is the 2^nd and last installment of the “When to incorporate” blog series.

On the previous blog, you will notice that when we spoke of the $30,000 of tax free dividends, we stated the fact “if this is your only source of income”  If you have other sources of income the $30,000 (approx.) is not tax free, but you will pay some tax at a lower rate.  The reason why you always pay a lower tax rate on dividends from Canadian corporations is because of the dividend tax credit that you get when claiming dividends on your personal tax return.  If you have other sources of income, particularly large amounts of income, you may want to incorporate earlier.  As discussed, when you set up a corporation you are forming a new entity.  This is a separate entity from you and therefore the income of the corporation does not go on your personal taxes unless you receive or claim income from the corporation.  This differs greatly from a sole proprietorship where you and the business are one in the same for income and liability purposes.  So again, if you have other sources of income you may want to incorporate for tax savings before you are netting $35,000 so as to keep corporate income separate from your personal income that may be in a higher tax bracket.  When in doubt on this one, come see us and we can run scenarios to see when you will start saving tax with a corporation.

The second and third reasons of “When to Incorporate?” are much simpler, yet can take serious thought and consideration!  The second is liability. If you have major liability potential in the product or service you are providing, you may want to incorporate right from the beginning of the business so as to take as the least amount of personal liability.  You may also want to look at trusts and holding companies that we will discuss in other blogs.  You must always asses your potential liabilities when starting any business. 

The third reason is to make your business attractive.  As discussed in the last blog if you want to make your business attractive you should look at incorporating.  If you are going for it 100% and you expect to do well quickly then you may as should look at the option of incorporating right from the beginning!

Watch for my next blog where we will begin discussing the structuring of a corporation.