Simple systems are the best systems. The same is true for businesses. It’s best to keep things simple. Here are 6 choices that you can make to simplify your small business:
To Incorporate or Not to Incorporate
You do not need to incorporate in order to run a business. In fact, a lot of businesses are carried-on as sole proprietorships. Sole proprietorships are businesses that are carried on by an individual. A sole proprietorship can operate under the name of that individual or under a registered business name. And sole proprietors don’t need to work alone; they can employ people and hire contractors just like a corporation can. As a sole proprietor, all of the business’s income is your income and all of the business’s expenses are your expenses. It also means that all of the liabilities of the business are your personal liabilities.
If you were starting up a business that you don’t expect to be risky then you might do just as well to start up as a sole proprietor and see how it goes. If the business does well then you can always incorporate it later.
The benefit of starting as a sole proprietor is that it substantially reduces the cost and time of getting started (and it reduces ongoing costs and time demands as well). If you want to learn more about what those costs are, just check out our article that offers a Sneak Peek Into Company Costs After Incorporating.
Having said that, you might still want to (or need to) incorporate for other reasons. For example:
- to protect yourself personally from liability, particularly if the business operates in an industry where there is a high risk of liability;
- to become eligible for certain grant funding for tax programs (some grant funding and tax programs are not available for sole proprietorships, however, making business decisions just to qualify for government programs is sometimes not worth it in the long run);
- to defer or reduce taxes once the business is substantially profitable.
Share Classes
A lot of people start a business wanting the best possible structure in place. They try to think about all the potential scenarios down the road and want to plan for them from day one. That can result in a share structure that is more complicated than necessary.
What I mean by “share structure” is the classes of shares that the corporation can issue and the various rights/restrictions associated with those classes of shares.
The most straightforward way to begin is with an unlimited amount of common shares. In most cases (but not all cases) that is all that is needed.
Share classes can be added, amended, and removed at any time in the future (provided that a sufficient amount of the existing shareholders agree). It will require some paperwork and filing with the corporate registry, but it’s relatively easy to do. And the benefit of starting with a basic share structure and adding more complexities later on are:
- you will understand your share structure from the very beginning (rather than being confused by unneeded share classes);
- if you decide to amend the share structure in the future it will be at a time when you know more about the business and how the share classes should be structured; and
- you’ll probably have more money available to spend on legal fees if you need a lawyer to draft more complicated share structures.
Holding Companies
A lot of people also want both a holding company and an operating company. It’s usually because that’s what they’ve seen successful businesses do.
The way that holding companies work is this: The holding company owns most of the valuable assets that are needed to carry on a business and the operating company actually carries on the business. The holding company makes those assets available to the operating company to use in the business, by way of leases, licenses, etc. The operating company takes on all of the liabilities, such as employing the employees, purchasing supplies, obligations to customers, etc…
If the operating company is profitable then some of those profits might be paid up to the holding company (usually through dividends) to keep the cash assets safe in the holding company. If the operating company goes through a hard time (for example, it is sued and loses the lawsuit) then it can be wound down… but since the holding company owns the assets the holding company can start a new operating company and those assets can be used to continue the business inside a new operating company.
The problem with holding companies is that it creates an additional layer of administration and costs. There are the regular costs of incorporating the holding company, carrying out its regular maintenance, and accounting/bookkeeping costs… but there are also legal costs associated with putting in place the proper agreements between the operating and holding companies.
In most cases, a holding company is not necessary. It ends up being a drain on cash and time. For more details, check out this article from CIBC about holding off on a holding company.
If a business is doing well then it can always form a holding company later on and roll the key assets into that holding company (though this is something that requires assistance from a lawyer).
Having said that, there are some situations where a holding company is still a good idea (even for businesses just starting out). For example, if the operating company is going to be operating in a field where there is a lot of potential for liability and where the business requires a lot of capital or other assets to operate. In that case, you would want to isolate those capital-intensive assets in a holding company and make them available to the operating company via lease and license agreements, rather than holding them directly in the operating company.
Banking
These are basic rules, but important to state: Make sure that you open a bank account for the business that is separate from any personal accounts. It will make your life much simpler in the long run.
Also, it can be tempting to take advantage of promotions offered by credit card companies. But make sure to stick with a credit card offered by whatever bank or credit union that your business account is with; it will make it much easier to keep track of spending and transfer funds when necessary.
Employees
Hiring employees is a whole new ballgame. It triggers many obligations: you need to set up a payroll account with CRA, you need to submit regular payroll filings with CRA, you need to remit deductions to CRA regularly, and in most provinces, you need to register with the local workplace insurance provider, and you need to sign up for a payroll service.
On the contrary, none of those steps are required if you hire independent contractors.
The difference between employees and independent contractors is a bit fuzzy. Ultimately it’s a tax question determined by CRA based on a number of factors.
If you need people to work for you and if those people can legitimately be treated as independent contractors (as opposed to employees) then it can really simplify your business (at least at the outset).
Record Keeping
It is tempting to cut corners with your business. Especially if it’s a small business or if it’s just you or a few people involved. But cutting corners slowly creates a mess, and that mess makes your business more complex and less simple over time.
So, our recommendation is to take a simple approach to structuring your business… but make sure to do things well the first time.
This is especially true when it comes to keeping good company records. Doing it properly will pay off hugely in the long run and will simplify your business.
We hope this article gives you a better understanding of what it takes to start up your small business. Contact us today if you have any questions.
The tobuso.ca platform was designed specifically to help you keep your company records in good order. Once your company is on the platform it is easy to keep your records up-to-date and to share them with collaborators. Sign up today!
