Check out our answers to frequently asked questions about opening your first business to help you prepare for this adventure.
Question: I'm thinking about turning my hobby into a business. Do I have to form a corporation?
Answer: No, you don't have to form a corporation to start a business. There are three basic business structures: sole proprietorship, partnership, and corporation (company). Many businesses start as sole proprietors, and then progress to becoming a partnership or corporation later.
Q: Are there any rules around how I name my business?
A: You must avoid the same (or a confusingly similar) name as an existing business name or trade-mark. Get more help on how to name your business and avoid infringing on the names and trademarks of existing businesses from the Canadian Business Network. You can also learn about trademarks on the Canadian Intellectual Property Office website. Double-check by searching both online and local business directories. If all these avenues show no one is using your preferred trading name, you should be in the clear to go ahead. If by some unfortunate chance someone else is using the same name, you can at least show that you made a serious attempt to find a match.
Q: Do I need to register my business before I open?
A: You may need to register with several different levels of government for various reasons. Find out more about what’s involved in your region from registering your business. It’s also worthwhile taking the extra step of registering your business name a trademark. For a modest fee, this allows you to protect your brand and prevent others from using a confusingly similar trademark. Over time, your brand should grow in value and become an important asset.
Q: If I'm starting as a sole proprietor, should I open a separate bank account?
A: Yes, because it allows you to separate your business income and expenses from your private income and expenses. To save some time, check what information and documents you need to bring with you to open a separate business account with Meridian. The documents required will vary depending on the business structure you have chosen (sole proprietor, partnership or corporation).
Q: Should I use an accountant or lawyer?
A: You can decide to take care of taxes and GST/HST returns yourself, but be prepared for a steep learning curve. Most small business owners use an accountant because this allows them to focus on growing their business and leaving tax affairs to an expert. Ask your contacts already in business for recommendations, and choose an accountant who works with other small businesses. Your accountant should be able to save you money and stress by advising on what you can claim and how. It is important to gain an overview of how taxation applies to your business so you can, with the help of your accountant, plan how you will comply with tax requirements. It is also a good idea to consult a lawyer about your business intentions, particularly if you intend to sign a lease, contract, or other legal document. Depending on your business, a lawyer might advise you to take out liability insurance or other forms of protection.
Q: Should I approach the Canada Revenue Agency?
A: Yes, of course. You can get a lot of help and information from the Canada Revenue Agency. Your tax dollars fund this service, so why not make full use of it? You’ll find the new businesses section useful for answering your basic questions about setting up a business and getting a Business Number. The website also lists various helpful publications you can download. There’s also a useful video series on Starting Your Business. You can ask for free advice from a tax services office or tax centre in your area even if you’re just thinking about starting a business. Small businesses can go online to ask for free in-person help through the Liaison Officer service.
Q: Can you briefly explain the pros and cons of the different business structures?
A: At the risk of oversimplifying, here's a broad outline of the differences. But remember - you should always get expert advice before you choose your business structure.
Sole proprietor
As a sole proprietor, you are the business and the business is you. Most people start this way because it offers a low-cost, easy entry, but the disadvantage is that you are solely responsible for the debts and liabilities of your business. It is also more difficult to raise capital on your own. You’ll be taxed on your income from the business at your personal rate, which may put you in a higher tax bracket if your business is profitable.
Partnership
A partnership is a business where two or more people share ownership. Partnerships are generally simple and inexpensive to form, though developing an appropriate partnership agreement can take some time. All partners contribute to the business, often bringing complementary skills and resources or pooled finances, and all partners share in the profits and losses of the business according to the terms of the partnership agreement. You are taxed at individual tax rates on your income from the partnership. The disadvantages are your personal liability, both for your own debts and business decisions and for the incurred debts and business decisions of your partner(s). In addition, partnerships come with the risk of disagreements and disputes between partners. A variation is the limited liability partnership, which means you would take no part in the control or management of the business and would be liable for debts to a specified level only.
Q: How do I register a corporation, and can I do it myself?
A: You can browse information on incorporation in Ontario and download the Guide to Federal Incorporation on the Corporations Canada website. Although you can do it yourself, many new business owners get advice from their accountant or lawyer to ensure that they choose the right business structure and comply with all requirements. It’s a question of where you want to focus your energy and productive time when you are starting a business.
Forming a corporation means you are creating a legal entity that is separate from the owner(s) and shareholders. The advantages are that as a shareholder you will not be personally liable for the debts or obligations of the corporation and the corporation can continue to exist without you, making it easier to raise finances, transfer shares, or sell the business. The disadvantages are that corporations are closely regulated and more expensive to form than sole proprietorships or partnerships. You also have to keep extensive corporate records and documentation. As a new business owner, you may be asked to pledge collateral or sign a personal guarantee to raise funds or gain supplier credit, which can cancel the advantage of limited liability.
Q: Should I write a business plan for my business?
A: Creating a business plan is a good idea for several reasons. First, the research and thought you'll have to put into writing it will help you to sharpen and/or adjust your ideas. Also, any lending institution that you approach for funds, like a credit union, will want evidence that you've done your homework and thought through your business concept. Finally, the plan provides a road map for your business. It lays out what you intend to do, how you intend to do it, the resources you need, and your action deadlines for each stage. It’s a living document that you can revisit at regular intervals and modify according to your progress or changing circumstances.
Get a business plan template and other helpful resources
Q: What help or funding is available for small businesses?
A: Meridian’s Quick Start financing helps business start-ups get financing in their first two years of operating. Whether you need to purchase equipment or inventory, or just need to boost your working capital during the start-up phase of your business, we can help you. Our banking advisors will also help you access government funding provided through the Canada Small Business Financing Program.
Q: Do I need business skills or experience to start a small business?
A: The failure rate of small business start-ups is high. One major reason is lack of business skills. So yes, you should start learning all you can and improving your business skills.
Perhaps the most important ingredients you need to succeed are enthusiasm and drive, backed by persistence and a determination to achieve your goals no matter how much hard work is involved. But you’ll greatly improve your chances of success if you have good business skills. These include the skills to market your business in a creative and sustained way, and the skills to build and manage efficient business systems that enable the business to operate smoothly.
Many people start small businesses because they’re good at something or can offer specialized knowledge. They often fail because their other business skills are poor, or they spent little time on the ‘boring’ aspects of their business. It seems easier to just do what you enjoy instead of keeping the books up to date, chasing debtors, invoicing promptly, doing a cash flow forecast, or managing tax compliance. Enjoyable or not, though, when you neglect these tasks the business suffers.
Another major reason for failure is lack of experience in the chosen industry. The solution is to work in the industry before you start or buy a business in that industry – even if you have to work for low wages or just for the experience. Running a bed and breakfast might seem like an easy way to make money until you’ve actually tried it and learned about the hard work and energy required. Managing a coffee shop might seem great until you experience the long hours and pressure that hospitality work often involves. Learn about the advantages and the disadvantages of the industry you’re interested in before you take the plunge.
Our Business Advisors are ready to help you
A version of this article was originally published on December 21, 2017
