The Transition from Employed to Self Employed Part 1

Many people who are employed at one time or another in their life, consider making a transition to being self employed.  Be it a dream of opportunity, more freedom, more time to spend with family, more options to travel, or other dreams and goals, many things can draw the employed to becoming self employed!  Although these things may draw people, they forget that it can be much harder work, longer hours, and less free time when the self employment starts!  This of course is not always the norm, and if you work hard at the beginning, you probably will have more free time later down the road!  Becoming Self Employed is a major decision and should not be taken lightly.  If you are considering becoming self employed than you want to ensure your family is on side with this decision because the more support you have in becoming self employed, the better chance you have of succeeding.  Self Employment is not for everyone, so weigh out everything very careful when making this decision.

There are many ways people make the transition from employed to self employed, however they mainly fall into 3 categories:

1. Gradual Transition
2. Instant Transition
3. 3^rd Party Contract Services

In this blog series we will discuss all 3 of these options.

Let’s start with the first option – Gradual Transition. 

The first option to make the transition from employed to self employed is through a gradual transition.  This means that you would continue to stay employed while starting your business on the side.  The good thing about a gradual transition is that you will continue to have stable income from employment while you build your business slowly. If the business doesn’t work out, you still have your job.  Many businesses do not start with a lot of income, so in the case where you will build up income in your business slowly you will still have the comfort of a steady paycheck.

We’ll continue our discussion on Gradual Transition on my next blog post! 

Partnerships 101

In this blog we are talking about unincorporated partnerships.  Check our other blogs for other forms of corporate partnerships, limited partnerships and more.  A partnership is established when two or more people agree to pool their financial, managerial, technical and other resources in order to operate a business for profit.  Like a sole proprietorship, a partnership is not taxed as a business that is separate from its owners.  The income from the partnership is included as part of the partners’ personal incomes and taxed accordingly.

The main advantages of partnerships are:

Ø  Because two or more people will be in business together, they can combine their finances in order to invest more than either could have done individually.

Ø  A partnership will most likely be able to borrow more than a sole proprietorship because creditors will have the credit & collateral of two or more people instead of only one to secure their lending.

Ø  Partners can pool talents and resources to accomplish more.

The main disadvantages of partnerships are:

Ø  Like a sole proprietorship, partners in a partnership are also exposed to unlimited liability incurred by the business, in relation to their % of ownership.

Ø  The partnership ends every time a partner leaves, unless provided for in a partnership agreement.

Ø  Start-up costs can be as high as, or even higher than, the cost of incorporating, due to the cost of Partnership Agreements.

If you are considering a partnership you may not want to use this typical form of partnership, but instead consider using a corporation or limited partnership.  Please contact us if you require more information on business structuring or partnerships.

My next blog will be about Professional Corporations so please visit my blog again!

Limited Partnership 101

Limited Partnerships are a special form of partnership, often used where investors want the tax treatment that comes from a partnership relationship, without incurring personal liability for all of the partnership debts.  Limited Partnerships (LP’s) consist of a General Partner, responsible for managing the business of the LP, and the Limited Partners, the silent investing partners that have no say in the business activities. 

The main advantages of limited partnerships are:

Ø  Limited partners have limited liability.

Ø  Both Income and Losses are flowed through to limited partners.

Ø  It is easy to attract investors to an LP.

Ø  Allows for experienced general partners to use their expertise in running the business.

Ø  Limited partners can leave without LP dissolution.

The main disadvantages of limited partnerships are:

Ø  There are more filings, formalities, requirements with limited partnerships.

Ø  It can be costly to form a Limited Partnership.

Ø  General partners assume personal liability.

Ø  Much due diligence is required before investing as you are trusting your money in the hands of the General Partner.

Both General Partners and Limited Partners can be corporations.  There are many uses for Limited partnerships, including minimizing and deferring tax.  If you have any questions on Limited Partnerships or other structuring  questions don’t hesitate to contact us!

We’ll take a look at Partnerships next week! 

Holding Companies 101

Also called a parent company, a holding company is a company that owns part, all, or a majority of other companies' outstanding stock. (shares)  A holding company may or may not be used for holding other assets and leasing them to an operating company. 

The main advantages of holding companies are:

Ø  A holding company offers the ability to segregate earnings from the main operating company.

Ø  With proper planning you can creditor-proof the assets of the business.

Ø  Can be used for Income Splitting Purposes.

Ø  Generally, if set up properly, you can issue dividends from an operating company up to a holding company on a tax-free basis (Onshore and Offshore)

Ø  Easy to move money between Holding company. and Operating companies via dividends and loans, etc.

The main disadvantages of holding companies are:

Ø  Requires more cost and time, as you now have more than one corporation.

Ø  Requires more planning to be able to effectively use your Holding Company.

Ø  Holding Companies don’t qualify for the Lifetime Capital Gains Exemption on qualified small business shares.

Holding companies should be used in conjunction with a family trust where possible.  The advantages of having a holding company far outweigh the disadvantages, so if you are considering implementing a holding company in your structure please do contact us.  We are here to assist you with all your structuring needs.

Please check back next week and we’ll discuss how Joint Ventures work. 

Working with your Corporation Part 9: Record Keeping

We would like to make this very important comment: “Good Record Keeping is a must!” Good record keeping is a must for 2 main reasons:

a.      You should always know where your business stands financially

b.      You will need all documentation and paper trails if/when you get audited

Create yourself a simple filing system that matches our bookkeeping intake checklist (Found on our website under our downloads section). Use inboxes, folders or a filing system that works for you and your routine.  It should be as simple as putting all paperwork and receipts into the right inbox or folder daily.  If you are on a monthly package with Kustom Design, we have envelopes with the checklist on them that are available to give us your paperwork (records) every month. 

Important Note on Record Keeping: Good Record Keeping also allows for good bookkeeping which in turn brings accuracy and savings!  Also if and when you are audited, your records need to be in great order, because if CRA finds a mess and has to reassess then they may keep coming back year after year!

We also mentioned in an earlier blog that it is important to file and pay taxes on time when they are due.  Here are some guidelines in this area:

Our goal is to always have you pay lower taxes.  In planning with Kustom Design we can typically help our clients pay little to no tax. However, you must plan ahead!  When taxes are due, they must be paid on time, otherwise interest does accrue.  Also, if you don’t file your returns on time, penalty and interest can occur.  Because the government is in deficit, many of the penalty rates have been raised considerably, so always file on time. Payroll, Corporate tax and other penalties and interest can put businesses into such a financial strain that some never get out from beneath the debt load.  Here are the main returns that must be filed on time:

1.      Personal Tax Return

2.      Corporate Tax Returns

3.      Payroll Remittance Filing

4.      T Slip and Summary filing

5.      GST Remittance Filing

IMPORTANT NOTE REGARDING PAYING TAX: If you do not put away funds for Corporate Taxes and GST, chances are you will not be able to pay the taxes when they are due.  We recommend putting 15-20% of all revenues aside in a tax savings account.

In the next section, we have the due dates of each of these filings and returns for you.  Always file on time to at least avoid penalties, and avoid interest where possible!