How to Register your Small Business
Congratulations, you’ve just taken your first step to owning your own small business. By clicking on this blog, you’re curious as to what is needed to start a company. It may seem complicated to you but it’s actually not hard at all to understand. In this blog, I will show you the first steps you need to know in order to get started.
Sole Proprietorship, Partnership or Corporation?
You may be wondering what the title above has to do with anything. I’m a business owner going into business alone. I can just get up and start running a business when I want with a name of my choice – WRONG. Unless the business is under your own personal name e.g. Prince Khan and you are filing your taxes under your personal name, then you’re not doing it right. Starting a business requires you to register the name if you are not using your personal name for your business. So if you want to call your car wash Car Care Services, you must register with the Province of Ontario as a Sole Proprietor, Partnership or Incorporate Provincially or Federally. Let me tell you how to do this and where to go.
1. Sole Proprietorship/Partnership – Save yourself the time and effort in searching on how to register a business and visit www.serviceontario.ca/business and look for the business registration section. Some private organizations can charge you up to $200 to register Sole/Partnerships when it only costs $68. As long as you have a credit card you can register online. You will also have to do a name search initially to see if there are any other companies using your proposed business name. If another organization using the same name is registered before you, they can legally make you change your business name and also sue you for infringement for using their name, so be careful. This name search is $8 per search and should be done to ensure you are safe from liability. Once you find the right name, you can now register and now legally by going back to the registration page. The registration is straight forward and will cost you $60 to get your Master Business License. This is the license you will need in order to open a bank account and also get payments into your business.
Side notes: If you are a Sole Proprietor or a Partnership (General), then you are legally liable for any debts that may be placed upon you. Your personal assets (car, house) can be used against you if you were to go bankrupt or owe any debt. You never want to be in that position where you have taken on so much debt and are liable for it through your personal assets. Ensure you only take as much as you need to get your business going. I would also encourage you to look into small business insurance to cover some of the unexpected costs which can potentially hinder your business.
Along with the above, make sure when you are in a partnership that you have a partnership agreement clearly outlining the percentage of ownership and roles and responsibilities of each of the owners. This is important as it determines who the business owners are and what percent of profit/losses the owners share in the business. The same rule of your personal assets being taken from you in default applies for this type of ownership, except it’s split between the two partners.
What is a limited partner?
A limited partner is someone who has no physical control of the business (they can’t get involved in daily duties) but they have vested interest in funding the business through a cash investment. The benefit of a limited (corporate partner) is that they are only limited to the amount of money they put into the business similar to the concept of a corporation which I will discuss next. Limited partners are not liable for anything beyond their initial investment unless they have signed a personal guarantee for a loan, which is an exception.
I’m scared of taking on debt and not being able to pay it back, so I will incorporate.
Fantastic, incorporating is a great way to limit your liability and not have your house/ car or any personal assets be used against your business debt. This is because you are a separate legal entity from your business. However, there are disadvantages of incorporating as well. I will explain a few of the advantages and disadvantages below.
Limited Liability: When you incorporate as a single owner of a company or incorporate as a team, you are automatically safe from having your personal assets stripped from you. Similar to the Limited Liability Partnership, you become a Shareholder of your entity. Although you may own the business, you are actually an employee of the business. As you get paid a salary which you can expense this against your business or get paid dividends which are after tax profit. In the case of a sole proprietor/partnership, you cannot expense your salary. You can take money out as drawings from the net profit you make from your business, but this is not an expense you can incur as a sole/partnership.
Corporate Tax Rate: There are potential tax advantages of owning a corporation. As a sole proprietor you are taxed at your personal tax rate which can range from 20% – 50%. As a corporation you are taxed at your corporate tax rate of 12.5% up to $500,000 if you don’t take any money out of the company. So, this would clearly be an advantage to someone who has accumulated way more income then they need to live off. The main thing to remember before incorporating is “Do I make more money then I need to live off”? If yes then you would incorporate, however if you say no, then the incorporation would not be worth it. I personally recommend doing a Federal Incorporation because it will cost you $200 for registration and $13.80 per name search. Provincial starts at $300 and doesn’t allow you to trademark your name across Canada. You can register your Federal Incorporation here: www.ic.gc.ca
Continuous Existence: Regardless of if you pass away or choose to no longer pursue this business, the corporation will remain active. Unless you file for closure your corporation will be around indefinitely. So be vary of this and that you may need a plan B if you decide to stop the company. A sole proprietorship/partnership on the other hand expires every five years and if not renewed after five years it will no longer be valid.
Raising Capital: When raising capital, it’s easier to do it through incorporation then it is a sole proprietorship/partnership. Reason being that you can add shareholders and dilute the equity of your business. For example, let’s say you are a single owner of a corporation and own 100% shares. By adding another shareholder who has vested interest in investing his money into your company, you can share a piece of that pie. So instead of you having 100% ownership of the corporation, you may give away 10% to the new shareholder and now have 90% ownership for some capital funds. Having the ability to raise equity vs. debt is great if you are looking for an alternate way of raising funds.
Closely Regulated: Corporations are highly regulated which can be challenging for small business owners. Therefore, the way you operate your business maybe limited to a certain extent. You must be ready to accept this if you do decide to incorporate.
Expensive: Corporations are expensive to start up and expensive to maintain. If you are to incorporate federally, it will cost you $200 plus a cost for searching the name. You can federally incorporate here: www.ic.gc.ca. Now this is if you federally incorporate. Provincially incorporating will cost you roughly $300 plus a cost for the name search with no annual filing fee. Now these costs do not include the cost of a lawyer or an accountant who is incorporating your company, which for you would be an additional charge if you go through that route. If you want to learn more feel free to contact me.
Separate Tax Returns: Unlike a sole proprietorship, you will need to file two tax returns. One for your business and one for yourself as you are paid through the company. This can be costly as doing a corporate tax return is not cheap. Generally accountants prefer you to be incorporated because they are able to make more money on doing corporate returns. Be sure to consider this when you are getting started.
Master Business License: Although you incorporate, you still might have to register a trade name in Ontario. This is only if you decide under your corporation to operate under different names. For example: Our corporation is called MajestiQ Professional Advisors Inc. but we registered a Trade name as MajestiQ Bookkeeping. This is an additional cost $60 cost that you will incur on top of the already hefty fee to get your business started. But in this case, your business, under the protection of the corporation will be safe from personal liability.
There are more advantages and disadvantages of owning a corporation, but these are some good starting point for you to grasp. Opening a business requires you to register and it depends on what type of ownership you feel will be best for your business. Think carefully before deciding and I hope this guide is able to answer a few of the questions that you may have had.