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5 Steps to Get Your Business Started on the Right Foot

Written by  MOHAMMED MECKLAI

Have you ever thought of starting your own business? Do you dream of becoming your own boss and doing what you love for a living? Are you the next leading entrepreneur? If the answer is yes, you might need more than passion to succeed.

Many entrepreneurs dive into their dream business blindly; however, they might be more diligent if they realized that 30% of start-up businesses won’t survive longer than 2 years, and around half of the companies no longer exist after 5 years in Canada. The following 5 essential steps can help you avoid unnecessary costs and get your business off to a good start.

 

start a business

  1.     Do Your Research and Develop a Business Plan

Former CEO of Boston Properties Mortimer B. Zuckerman once said, “before you build a better mousetrap, it helps to know if there are any mice out there.” It is important to research your target market and competitors before you open your doors. Is there a demand for your service or product? What area of the city is there a market demand and who are the competitors in that area? What is the best way to reach your target audience? Can you offer a leading service or product that differentiates you from your competitors and ultimately drives the customers to choose you over them? The success of a business in Canada is viable by researching the above questions before you go ahead with your business idea. Once the information is gathered, draft a business plan to provide guidance and financial requirements for starting the business.  If possible, start small and gain some experience before you thoughtlessly invest all your funds and resources.

  1.     Set Up Your Company with the Right Structure

Once your business plan has been finalized and is ready to be executed, it’s time to choose a business structure that is most appropriate for your industry, meets personal and/or shareholder(s) requirements and tax planning. A sole proprietorship is the simplest option, which does not require any formal registration. With this structure, the sole owner of the business can keep all profits, but also is entirely responsible for all debts related to the business. A sole proprietor reports his/her income or loss by filing a personal (T1) income tax and benefit return.

Another type of business structure is a corporation in which your business becomes its own legal entity, and you will not be personally liable for the debts as a shareholder. Incorporation can be done at the federal or provincial/territorial level.  Federal incorporation has some advantages, for example, you can use the same name to do business across Canada; however, it’s more expensive and requires more paperwork. A corporation in Canada reports all of its income or losses by filing a T2 corporation income tax return.

Another option is a partnership which is often seen in real estate development and with professionals. In a partnership, each partner is mutually liable for the debts of the partnership (general partnership). A partnership agreement is needed to help avoid disputes before establishing a partnership. Each partner reports their share of the partnership’s net income or loss. If the partnership units are held by an individual, the partnership income or loss would be reported on their personal income tax and benefit return. If the partnership units are held by a corporation, the partnership income or loss will be reported by the corporation's T2 tax return. Other options may also be available depending on your industry or jurisdiction. The business structure should be discussed with your accountant and lawyer to ensure your business starts off correctly!

  1.     Meet with the Accountant

Once the business has been incorporated, it’s time to setup a meeting with your accountant. During the meeting, the accountant should be well informed of the all the products and services the business will be offering to consumers as well as the geographical locations these products will be sold. Based on this, the accountant can provide you with advice on sales tax within and outside of Canada as well as assist in opening sales tax accounts with the correct government authority. If the business requires employees, the accountant will set up a payroll account with Canada Revenue Agency and explain the payroll source deductions requirements. It is important during the meeting to discuss all the government compliance required for personal and corporation for the calendar and fiscal year.

  1.     Keep Track of Your Income and Expenses

Knowing your numbers is vital for key decision making. If you have a good grasp of your profit/loss, cash flow, sales, and net income, you will be able to predict the success of your business. Knowing how much is being spent and what can be trimmed is the first step to keeping your costs down.

You can choose cash or accrual accounting depending on the size of your business. Under the cash method, transactions are recorded when cash is received or paid. Under the accrual method, transactions are recorded when the service/product is delivered, and when the order is made. No matter what method you are using, the most important thing is to keep receipts of every expenditure for your business. You must back up your purchases and sales with receipts showing date, amount, and other relevant information. For tax purposes, these records need to be retained for six years in the event that the Canada Revenue Agency (CRA) wants to review your tax returns or audits your business. The second step is to summarize your income and expenditure records by creating financial reports that will tell you if your business is growing and how much profit you are making. If possible, it’s helpful to purchase accounting software or hire a professional to keep your books and help you get an accurate picture of your business status.

  1.     Understand and Maximize Your Tax Deductions

Knowing how to take advantage of tax deductions can help you reduce your taxable income and thus, the amount of tax you owe to the CRA. Many business expenses are 100 percent deductible. These include office supplies, professional fees, wages paid to your employees, store rent and utilities, repair and maintenance, business insurance, and business travels. Some capital expenses must be depreciated over a period of years such as furniture, equipment, computer, vehicle, and start-up and organizational costs. The business portion of the motor vehicle expenses can be deducted, but an accurate logbook of business travels through the entire year is required by the CRA to support your claim. If you have a home-based business, you are entitled to claim the portion of your home expenses related to the business use of a workspace in your home. These include property tax, rent, mortgage interest, maintenance cost, and utilities.

Another beneficial tax deduction is the small business tax deduction. If you are a Canadian-controlled private corporation (CCPC) and meet other conditions a per the Income Tax Act (ITA), you can claim a small business tax deduction, which allows you to be taxed at a lower tax rate. You can work with a professional to discover some tax planning strategies to ensure tax efficiency by minimizing your taxes.

 

Owning a business means you must plan and have the correct resources for you and your business to succeed. The 5 steps above with the advice of a professional accountant will ensure you will start your business in the right direction.


ABOUT MOHAMMED MECKLAI

Mo (Marketing Picture) (2) (1)Mohammed Mecklai is a Chartered Professional Accountant at Mecklai Tax & Accounting.  

As a previous owner-operator of an automotive repair shop to a Chartered Professional Accountant, Mohammed has the experience, knowledge, and understanding of being an entrepreneur and business owner in meeting his clients financial and accounting requirements. Having years of public practice experience and directly working with private companies and their shareholders, Mohammed strives to find the perfect solution for clients.

He has significant experience in many areas including real estate, construction, manufacturing, automotive repair, professional service sectors and investment holding companies.

https://mecklaicpa.ca/

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