If you plan on establishing your own venture, the following reference guide would be very helpful for you. This guide should help you effectively cater to a lot of problems which come in the way in starting off and running a business. With proper forecasting and planning, you will achieve more success in your business. Don’t forget to ask for professional guidance when you’re in doubt. The advantages will always overshadow the cost.
SELECTING THE LEGAL ENTITY FOR YOUR ENTERPRISE
One of the core decisions that you will be required to make while starting off your venture is the form of legal entity that the business plans on taking. To a certain extent, this may be influenced by the way you are managing your operations and whether or not you plan to work individually or partner with others.
Whichever form of entity that you choose your business to be has a substantial impact on how protected you are under the law and how the income tax rules and regulations affect you. There are three major forms that any business organization could take. Each of these forms have their own set of pros and cons and have a different process in terms of legal and tax purposes.
A business which is owned and run by a single individual is known as a sole proprietorship. It is not considered a separate legal entity under the eyes of the law but rather is an addition of the person who owns it. The owner has the ownership of all the assets in the venture and is also responsible for all the liabilities and debts that occur in the business. There is an alternative to the personal possessions of the owner. The profit or loss of the sole proprietorship in a part of the T1 personal tax return and is added to the other earnings of the owner for purposes of income tax.
The sole proprietorship is probably the simplest form of business to start up and run. This is because it doesn’t need any certain legal organization excluding the basic information such as permits and licenses. Originally, a sole proprietorship doesn’t have any rules and regulations which it needs to function under, excluding those which are linked to whatever industry the business is planning to work under like real estate or insurance, etc. the decisions that are taken are only the results of the abilities of the person running it.
There could be two legal forms that a partnership could take; general or limited. Typically, in a partnership, two people join together to start a business. Usually, a partnership must be registered with the Provincial authorities. Both the individual partners have the possession of the company’s assets and are responsible for the liabilities and equal authority of running the business. The possession of the partners, and how the profit and loss are to be shared by the individuals is tailored according to the partnership agreement. The share of liabilities is also adjusted according to the partnership agreement made between the partners, although usually, the partnership creditors have alternates of the personal assets of all the partners that have agreed to the partnership debts.
A limited partnership consists of one or more basic partners, who are responsible for the partnership debts and one or more limited partners who invest in the capital and have their share in the profit and loss of the business but do not take part in running the business and its daily activities and are neither accountable for the debts and liabilities of the partnership.
Whatever the rights, responsibilities, and obligations of the partnership are, whether it is a limited or general partnership, they are all stated in detail in the partnership agreement. It is always a safe and good idea for any form of partnership to have a proper agreement at the start of the establishment of the business.
A partnership is a form of business which has a separate legal entity which has its recognition under the eyes of the law and also has its set of rights and responsibilities within and of itself. A partnership has a right to sign contracts, is applicable for trade credit and can also borrow money. If a limited partnership Is small in size, a lot of creditors need a personal guarantee from the general partners of the business.
If a partnership consists of 5 or more partners, they are required to file an information return with the CCRA, on an annual basis. A partnership, however, is not required to file an income tax return, but the information gained from the information return or financial statements is put in combination with personal income of the partner on their T1 personal tax return to figure out the complete tax liability of the partner.
A corporation is one form of business which is also a separate legal entity and exists only under the authority which is granted by the Provincial or Federal law. A corporation significantly has all the legal rights of what an individual has and is accountable for its own debts.it is also required to file an income tax return and pay its taxes regularly on the income that comes from the operations that take place within the business. Generally, the owners of the corporation are the shareholders who are safe from the liabilities of the venture. If, however, the corporation is small, creditors demand a personal guarantee from the actual principle owners before giving credits. The protection that the owners of the corporation get legally overshadows the expenses that are incurred while starting off and managing a corporation. Ontario corporations are required to file their annual income tax returns with the CCRA and the Ministry of Finance and the other provinces where they are running their business in.
When you incorporate a business, it unfolds a number of advantages which includes the ease of bringing in more capital via selling off the equity or letting an individual sell off or transfer their interest in the venture. It also helps cater to the continuation of the business when the original owners either chose to retire or sell off their interests. If you decide to convert your venture into a corporation, it would be best if you look for the advice of a competitive legal counselor or your Chartered Accountant.
REGISTERING WITH THE TAX AUTHORITIES
A very important task for a business owner who has just started his venture is to make sure that his business is appropriately registered with the correct tax authority. Also, the business needs to conform to the wide-raging tax and information filings requirements which are levied to by different government agencies. Penalties are generally analyzed if the forms or returns that were required are not filed on the time they were supposed to be filed at, or are not prepared properly. The following is a list of the most common registrations and requirements for most of the ventures:
- Canada Customs and Revenue Agency (CCRA) -www.ccra-adrc.gc.ca (1-800-959-5525). The CCRA is the Federal agency which is responsible for all tax, customs and trade management in Canada. The following are a few situations which show where registration with CCRA is required:
- Partnerships consisting of more than five (5) members and all corporations need to be registered and assigned which identify the numbers by CCRA.
- Any venture which has employee deductions, not considering the legal form, should also apply for an employee remittance account number.
- Businesses which carry out commercial activities and have annual sales exceeding $30,000 need to register for GST and get themselves a registration number. In a few situations, it may be beneficial for a business to register despite not being required to do so.
- CCRA, in an attempt to make matters simple, has established the Single Business Registration Number through which account numbers for Corporate Tax, Payroll Deductions and Goods and Services Tax consume the same digits followed by two letters to further distinguish the type of account. Now, a business can apply for its registration number online at www.businessregistration.gc.ca
- Ministry of Finance – Ontario – www.gov.on.ca/FIN/hmpage.html Probable listings include:
- Corporate income tax (1-800-263-7965 or (905) 433-6500) In Ontario, only corporations are required to file individual income tax returns. The profit from partnerships and proprietorships is a part of business income on an individual persons T1 personal tax return.
- Retail Sales Tax (1-800-263-9229) The Ministry of Finance needs all businesses involved in retail sales to get themselves a Provincial Sales Tax Vendor’s Permit and to charge and pay to the Ministry, the appropriate sales tax figures.
- Employer Health Tax: The Ontario Employer Health Tax (EHT) is evaluated on all wages of employees which exceed specific maximums.
Workplace Safety and Insurance Board – www.wsib.on.ca (1-800-387-0750): Employers are supposed to register themselves and report wages, and in specific circumstances, totals paid to sub-contractors, to the Workplace Safety and Insurance Board and to make payment to the suitable valuations on the stated amounts.
The following summarizes some of the more significant tax filing requirements:
|Goods and Services Tax||
|Ontario Retail Sales Tax||
|Ontario Employer Health Tax||
|Ontario Workplace Safety and Insurance||
ACCOUNTING AND BOOKKEEPING
Many operators of a newly established and emerging business have a skill for the environment in which the business functions. They may be the ideal salesperson, an excellent mechanic, engineer, lawyer or inventor. On the downside, the majority of the people are not fond of keeping their accounting records. As an owner of a venture, you should always remember that the books of your company and its financial statements signify a score sheet which not only shows you the progress of your business but also proves to be an early warning system which would let you know when and why the business may be going off track. Financial statements and the fundamental records will deliver the basis for many decisions that are made by outsiders like banks, landlords, prospective investors and trade creditors, including taxing authorities and other governing bodies. The importance for decent and well-organized financial records can never be over-emphasized, specifically ever since CCRA needs you to keep your records and invoices updated for at least 6 years. One of the ultimate mistakes that owners of small businesses make is not keeping financial records that are good and making unsuitable or poor business choices that are based on insufficient information.
Fine quality financial information doesn’t essentially interpret into complex bookkeeping or accounting systems. Very often, owners of ventures become astounded by their accounting system to the extent where it becomes useless for them. An accounting or bookkeeping system does the work of a tool used in your venture; it has to be cultured enough to provide the needed information in order to run the operations of your business and make them easier for you to run it (or administer the bookkeeper). Questions that should be asked in establishing an accounting and financial reporting system are:
- Who will use the financial information?
- What questions are supposed to be answered by us to manage the business?
- What questions are to be answered for the government or regulatory taxing authorities?
As your business emerges, you should work diligently with your accountant to ensure that your accounting system is giving you the suitable information.
Chart of Accounts
The elementary road map to any accounting system is the chart of accounts. This is the chart, which helps create the information which will be taken by your accounting system and which information will consequently be retrievable by the system. This tool, similar to the rest of the accounting systems, is required to be dynamic and should emerge according to the size and requirement of your business change.
To help develop a good working chart of accounts, you are required to answer a few questions in combination with your Chartered Accountant as to how your business is going to operate and what is essential to you. Some of these questions might be:
- Will your business have an inventory which you can account for? If yes, will it be purchased in its final form or will there be any production costs?
- Are fixed assets a substantial share of your business?
- Will you sell only a single type of product or service or will there be several different types?
- Will you have accounts receivable from customers that you need to track?
- Will you sell from only one location or will your business operate in several provinces?
- Will the products or services you plan to sell be subject to sales tax (GST and PST)?
- Are you required to track costs by department/location?
- What are the type of government controls or regulatory reporting which you are subject to?
Each of these questions may have various answers and will, most probably raise more questions. Each answer will have an influence on how the chart of accounts is planned. It may seem that making a chart of accounts is not exactly a priority on your to-do list as you start a new venture, however, the amount of time and money that a properly-organized accounting system may save for you can be essential as the requirement to generate information for different purposes increases. An example of a basic chart of accounts is followed by this section.
Cash or Accrual Accounting
One of the basic decisions that are to be made as you establish a business is whether you want to maintain your records on a cash basis or accrual basis of accounting. The cash basis of accounting has the benefit of its simplicity and it is easily understandable by everyone. Under the cash basis of accounting, you record sales only when you receive the money and record the expenses when you pay the bills. The appreciation in your cash balance by the end of the month is how much you have made.
On the downside, as we all are aware of, the business world is not always as simple. Sales are made to the customers and you sometimes have to extend credit. Your business will suffer liabilities that are due even though you might not have received the invoice or have enough cash available to pay them off.
A lot of users of financial statements like bankers and investors are adapted to the accrual basis and assume to see them prepared while using this method. Once you are acquainted with them, they prove to be a much better measuring device for the operations of your business compared to cash basis statements.
For a few taxpayers, it may be a possibility to keep books for income tax purposes on an altered basis than for financial statements. It may be more beneficial (less tax) for you to do so. Your Chartered Accountant can assist you with the benefits and practicality of doing this in your particular situation.
Accounting Records and Record Keeping
Another question that the owner of a business must have an answer to, is “Who will keep the books of the business?” Will you or your partner do it, will the receptionist or a secretary double and work as a part-time bookkeeper, will you have a bookkeeper who will come in occasionally, or will the capacity of activity be such that a full-time bookkeeper will be needed?
Very frequently the owners of a business decide to keep the books themselves and undervalue the obligation they have made to other stages of the operation and the time needed to maintain a good set of financial records and books of account. As a result, the record keeping is often little priority and is to be caught up later. This methodology, although seldom planned, can need an extensive expenditure of time and money. While it is significant for the owners of a small venture to keep control and keep themselves involved in the financial operations of the initiative, this can be attained by maintaining careful control over the cheque signing job and by examining specific records. Your business’s Chartered Accountant can help establish a good program of record keeping responsibilities for you, your employees, and any external bookkeepers you may involve.
The Importance of Computers
The computer is perhaps the distinct most treasured invention for bookkeeping and accounting ever since the dawn of double entry bookkeeping. If your business contains any of the following, then a computer would be a suitable tool in your business:
- Many repetitive or routine tasks.
- A lot of paperwork; i.e. payroll cheques, invoices, purchase orders, mailing labels.
- Numerous general correspondence.
- Written reports, contracts, newsletters, catalogs or brochures.
Your Chartered Accountant has knowledge of both your business and computers so he or she can take the confusion out of the assortment process by supporting you in the purchase and setting up of your computer software requirements.
There are various easy to use accounting software systems, that are commercially available, but neither of them will solve the issues of incorrect or poor-quality financial records. All they will do is generate bad information faster. If you want to use a computer-based accounting package, either in your own venture or via your Chartered Accountant, it is vital that you generate precise information to be entered into the system.
The actual value of the computer becomes obvious once it is running smoothly in your business. Your Chartered Accountant can then function in the volume for which they were trained, not as a “number cruncher” but as your business consultant, advisor, and strategist. Both of you can then pay more emphasis not on generating reports for various regulatory agencies but on evaluating your business to make it more profitable.
Illustrative Chart of Accounts
|1135||Allowance for Doubtful Accounts|
Long Term Investments:
|1220||Investments in Bonds|
Property, Plant and Equipment:
|1315||Accumulated Depreciation – Parking Lot|
|1325||Accumulated Depreciation – Store Equipment|
|1355||Accumulated Depreciation – Delivery Equipment|
|2110||Bank Loans Payable|
|2160||Income Tax Payable|
|2170||Provincial Sales Tax Payable|
|2180||Withholding Tax, EI and CPP Payable|
|2190||Goods and Services Tax Payable|
|2195||Advances from Customers|
Sales and Related Accounts:
|4010||Sales Returns and Allowances|
|5178||Purchase Returns and Allowances|
|6015||Depreciation – Parking Lot|
|6020||Depreciation Expense – Store Fixtures|
|6050||Depreciation Expense – Delivery Equipment|
|6070||Other Delivery Expense|
|6090||Miscellaneous Selling Expense|
|6510||Taxes, Municipal and Business Taxes|
|6535||Bad Debts Expense|
|6580||CPP and EI|
HIRING OF STAFF
One of the chief decisions to be made in the evolution of an enterprise is the hiring of staff. In Ontario, employment practices in regards to the occupational health and safety, minimum wages, working hours and the like are controlled by the Ontario Ministry of Labor.
A summary of a few of the vital issues related to labor are managed by the Ontario Ministry of Labor – Employment Standards Branch who can answer the enquiries on various problems.
The Provincial government inaugurates and revises a minimum hourly wage periodically, which has to be paid by employers. There are various distinct categories like those for students and liquor servers. The Employment Standards Branch can offer a list of the existing minimum wage by employment category.
advantages of vacation pays are applicable to full-time, part-time and student labor. Usually, new employees obtain a vacation pay entitlement of 4% of the total wages. Employers and employees have specific rights concerning the timing of the vacation time to be taken.
- Public Holidays
- Termination pay
- Overtime pay
- Pay equity
- Agricultural and transportation workers have special rules
Workplace Safety and Insurance
Within 10 days of hiring an employee who is a non-shareholder, many new ventures are asked to list themselves with the Workplace Safety & Insurance Board; few specific industries are exempted.
Employer Health Tax (EHT)
The tax is applicable to all wages paid in Ontario which exceed $400,000 in a year. The program is managed by the Employer Health Tax division of the Ministry of Finance.
Employee Source Deductions – Tax, EI, CPP, etc.
In addition to the above mentioned, the employer needs to attain an employee payroll source reduction account as part of gaining a Business Number from the CCRA.
SELECTING A FISCAL PERIOD (YEAR END)
even though a non-calendar fiscal year can be accepted for accounting purposes, individuals and partnerships with a single or more individual members are to report income for income tax drives on the basis of calendar-year. The simplest way to achieve this is to adopt a December 31 year end. The inferences of picking a non-calendar fiscal year end are to be reviewed with your tax consultant before continuing.
Incorporated businesses are not asked to report income on the basis of the calendar year and as a consequence are free to select a non-December 31-year end, given that it does not exceed 53 weeks from the date of incorporation. The fiscal period is not needed to be recognized at the time the business inaugurates. It may be established when the first tax return is filed for the venture.
There are a few tax benefits to choosing a single fiscal year end date over the other for an incorporated business. Fiscal periods that end after July 5 can propose some flexibility in terms of timing the payment of any owner-manager compensation.
The Annual Business Cycle
selecting a fiscal period when the venture is at the least point in its business cycle can diminish the amount of accounting for inventory, accounts receivable, accounts payable, etc. This can possibly make the end of year accounting simpler for all those concerned.
If there are other businesses that are related, there might be some economies recognized in having a similar fiscal period for these ventures. On the other hand, tax benefits may be realized by having dissimilar fiscal periods. All features should be well thought-out when choosing a suitable year end for the business.
FINANCING MATTERS AND THE BUSINESS PLAN
The business plan is crucial to a new business. This proposal is the blueprint to the financial feasibility of the intentional initiative. Your accountant can support you in preparing the projected financial results and possibly in forming a budget.
The significance of supervising and having sufficient cash flow will quickly become obvious when drafting the plan. Suppliers desire to be paid within the time permissible and should the business be frequently late in payment or incapable to pay because of undue investments in inventory, equipment etc., The continuous presence of the business could be vulnerable. Using the computerized spreadsheets, cash flow forecasting with the use of several assumptions is not an impossible task.
One of the first few foundations of financing a new venture is the capital of the owner, friends and relatives. Other bases of external financing involve mostly the chartered banks, credit unions, trust companies and the Business Development Corporation. Venture capital loan corporations naturally will take an ownership place in the company.
Leasing is a method of financing typically linked to the attainment of capital assets.
Your Chartered Accountant can frequently introduce you to these financial institutions and in many circumstances be acquainted with the advancing policies of the institution.
REGISTRATION AND REGULATORY BODIES
The government, in the interest of defending public safety, confines the creation of certain businesses by demanding regulatory licenses or certification. Examples comprise of the regulations and certification requirements of those who are a part of automotive sales, restaurants, servicing, and repairs. The Ministry of Consumer and Business Services (www.cbs.gov.on.ca) can guide these regulations, if any and can be reached at (416) 326-8555 or 1-800-268-1142
Municipal restrictions should also be taken into account. Through their licensing, zoning and bylaw regulation, restrictions can be positioned on locations where a venture is permitted to function. The clerk’s office in the municipality can give their recommendations on these matters.
Business insurance is a usually-overlooked cost of a new venture. Insurance, similar to any other service or commodity, must be computed on the basis of cost-benefit. Your Chartered Accountant and insurance agent can help you in forming that purpose. Co-insurance where the insurance company and the insured share the hazard may be the most cost-effective substitute.
In addition to orthodox types of insurance against loss due to fire, theft, and product liability, other types to be taken into consideration are:
Business Interruption Insurance
if the business is unable to function for a certain period of time, without business disruption insurance the cash flow damage could risk the continuance of the venture.
This is essential to businesses with employees that have access to important cash. In some circumstances, Regulatory bodies will need this category of insurance.
This category of insurance covers the losses that exceed the normal coverage and usually relates to the liability of various kinds to safeguard the net worth of the owner or the venture.
Wage Loss Replacement
In many circumstances, owner-managers may desire to take into consideration, wage loss replacement coverage other than Workplace Safety and Insurance to ensure adequate coverage at an affordable cost.
Telephone Numbers, Addresses and We bsites
CCRA Tax Services Offices and Tax Centres
32 Church Street
P.O. Box 3038
St. Catharines, ON L2R 3B9
150 Main Street West
P.O. Box 2220
Hamilton, ON L8N 3E1
St. John’s, NF
290 Empire Avenue
St. John’s, NF A1B 3Z1
275 Pope Road
Summerside, PE C1N 5Z7
1050 Notre Dame Avenue
Sudbury, ON P3A 5C1
Business Enq. & Registration
Corporations Income Tax (Ontario)
Ministry of Finance
Corporations Tax Branch
P.O. Box 622
33 King Street West
Oshawa, ON L1H 8H5
Tel: (905) 433-6500
Fax: (905) 433-6998
Government Info Centre
301 St. Paul Street, Ground Floor
St. Catharines, ON L2R 7R4
Tel: (905) 704-2111
Fax: (905) 704-2003
Government Info Centre
119 King Street West, Lobby
Hamilton, ON L8P 4Y7
Tel: (905) 521-7825
Fax: (905) 521-7851
Employer Health Tax Regional Offices
Ministry of Finance
Employer Health Tax
213 King George Road
Brantford, ON N3R 6S8
Tel: (519) 754-4849
Fax: (519) 758-2239
Ministry of Finance
Employer Health Tax
77 City Centre Drive, Suite 200
Mississauga, ON L5B 1M5
Tel: (905) 273-9490
Fax: (905) 949-3389
Ministry of Finance
Employer Health Tax
33 King Street West
Oshawa, ON L1H 8P5
Tel: (905) 436-4561
Fax: (905) 436-4474
Ontario Ministry of Labour
400 University Avenue, 14th Floor
Toronto, ON M7A 1T7
Tel: (416) 326-7160
Fax: (416) 326-6546
Niagara District Office
301 St. Paul Street, 8th Floor
St. Catharines, ON L2R 7R4
Tel: (905) 704-3994, 1-800-263-7260
Fax: (905) 704-3011
Hamilton District Office
1 Jarvis Street, Main Floor
Hamilton, ON L8R 3J2
Tel: (905) 577-6221, 1-800-263-6906
Fax: (905) 577-1324
Peel South District Office
1290 Central Parkway West, 4th Floor
Mississauga, ON L5C 4R3
Tel: (905) 273-7800
Fax: (905) 615-7098
Ministry of Consumer and Business Services
393 University Avenue, 2nd Floor
Toronto, ON M5G 2M2
Retail Sales Tax
Ministry of Finance
Retail Sales Tax Office
1600 Champlain Avenue, 2nd Floor
Whitby, ON L1N 9B2
Tel: (905) 432-3332
Fax: (905) 435-3535
Ministry of Finance
Retail Sales Tax Office
119 King Street West, 15th Floor
Hamilton, ON L8N 3Z9
Tel: (905) 521-7504
Fax: (905) 521-7868
Workplace Safety & Insurance Board
200 Front Street West
Toronto, ON M5V 3J1
Tel: (416) 344-1007
301 St. Paul Street, 8th Floor
St. Catharines, ON L2R 7R4
Tel: (905) 687-8622
Fax: (905) 687-7117
Standard Life Building
120 King Street West
P.O. Box 2099, Station LCD 1
Hamilton, ON L8N 4C5
Tel: (905) 523-1800
Fax: (905) 521-4502
Canada Customs and Revenue Agency (CCRA)
Business Number Registration
Ministry of Finance – Ontario
Ontario Ministry of Labour – Employment Standards Board
The Ministry of Consumer and Business Services
Workplace Safety and Insurance Board
CHECKLIST FOR NEW BUSINESSES
|Determine Form of Organization – Partnership, Proprietorship or Corporation|
|Lawyer to be consulted regarding legal issues in addition to form of organization|
|Consult accountant regarding business plan and computer hardware and accounting software decisions|
|Establish reporting requirements|
|Establish a fiscal period|
|Meeting with bankers to arrange line of credit and other required financing matters|
|Agreements regarding leases of real property, vehicles and equipment|
|Registration and regulatory considerations|
|Goods and Services Tax|
|Provincial Sales Tax|
Various Federal and Provincial Regulations