“A big business starts small.” – Richard Branson
Welcome to the world of small business in Canada, where ambition meets opportunity. As the owner or aspiring owner of a small business, you know firsthand the challenges and rewards that come with entrepreneurship. In this comprehensive guide, we will explore the key aspects of starting, growing, and managing your business while keeping your finances organized and planning for the future.
At ReInvestWealth, we work with small businesses and get the chance to see firsthand some of the common mistakes and misconceptions they may have. The goal of this guide is to help you move forward in your business in confidence!
Table of Contents
What's Different about Small Business in Canada?
Starting a small business in Canada offers unique advantages, such as access to a strong market, a stable economy, and a supportive entrepreneurial ecosystem. The Canadian government also provides various incentives, grants, and tax benefits to encourage small business growth.
However, like any business, there are challenges. Small business owners in Canada face compliance with intricate tax regulations, financial reporting requirements, and the constant need to adapt to a dynamic market. To succeed, you need a solid understanding of accounting and finance, which can be time-consuming and daunting.
We recommend starting directly with this article to get a deeper understanding of all the steps and considerations you’ll need to keep in mind.
Starting Your Business
Legal Considerations
Before launching your business, familiarize yourself with legal considerations. Choose the most suitable legal structure for your enterprise, such as a sole proprietorship, partnership, or corporation. Each type has distinct tax implications, liability levels, and reporting requirements. Here’s a short breakdown of each option:
Sole Proprietorship
A sole proprietorship is the simplest form of business structure, where an individual owns and operates the business. It offers ease of setup and minimal regulatory requirements, making it a popular choice for small businesses and freelancers. The owner is personally responsible for all business debts and liabilities, and there is no legal distinction between the business and the owner.
Taxation: Business income is reported on the owner's personal tax return, and they are taxed at the applicable personal income tax rates.
What kinds of businesses are a good fit for a sole proprietorship? Freelance work, solo entrepreneurs that don’t foresee having a large team, small-scale retail businesses, creative work, etc. The key point here is incurring a minimum amount of liability, since there is no distinction between the owner and the business.
Partnership
A partnership is formed when two or more individuals or entities (partners) agree to run a business together. Partnerships can be general partnerships, where all partners have equal responsibility and liability, or limited partnerships, where some partners have limited liability. A partnership agreement is essential to outline the roles, responsibilities, and profit-sharing arrangements among partners.
Taxation: The partnership itself does not pay taxes. Instead, each partner reports their share of business income on their personal tax return.
What kinds of businesses are a good fit for a partnership? If you already have a partner or co-founder, or intend to bring one on board in the near future.
Corporation:
A corporation is a separate legal entity from its owners (shareholders), providing limited liability protection to the shareholders. It requires more formalities and paperwork during setup and ongoing operations but offers enhanced credibility and potential access to capital. A board of directors manages the corporation, and shareholders' liability is generally limited to the amount they have invested.
Taxation: Corporations are taxed at the corporate tax rate on their profits. Shareholders pay taxes on any dividends received from the corporation.
What kinds of businesses are a good fit for a corporation? Any business that you want to grow, hire, or raise funds for may be a good fit to incorporate.
Check out our comparison here on self employed vs. corporations to get a deeper look at what makes this option unique.
Limited Liability Partnership (LLP):
An LLP is a hybrid structure that combines elements of a partnership and a corporation.
It provides limited liability protection to its partners while maintaining some of the flexibility of a partnership. LLPs are often chosen by professionals like lawyers, accountants, and consultants.
Taxation: Similar to a general partnership, LLPs do not pay taxes directly; instead, partners report their share of income on their personal tax returns.
What kinds of businesses are a good fit for a limited liability partnership? Professionals like lawyers, accountants, and consultants.
When choosing a business structure, entrepreneurs should carefully consider factors such as liability, taxation, setup costs, ongoing compliance requirements, and the business's growth potential. Making an informed decision that aligns with your goals and long-term vision at this point is crucial– don’t skip this step or rush through it!
Registering Your Business
Selecting a business name and registering it is an essential step. Registering your business ensures its legitimacy and protects your brand identity. Be sure to check for name availability and consider trademarking for added protection. Services like IncorpDirect can make it quick and easy to get registered, but it’s also possible to do it yourself, directly according to the government’s guidelines.
Set Up the Essentials
Now that your business is registered, acquire necessary permits and licenses. Depending on your industry and location, you may need federal, provincial, and municipal permits to operate legally. Here’s a short checklist to keep in mind when you’re in the beginning stages of your business:
Decide on your work location (Will you work from an office, a coworking space, or from home?)
Complete your business registration, according to federal and provincial requirements
Trademark your business name, or submit a trademark application to start (optional)
Check if your industry requires further permits, licenses, or certifications before beginning
Set up your basic communication methods (ex. Register for a business email)
Set up your basic documentation methods (Decide on where you will keep your important documents and track financials)
Start organizing your finances right away (Starting with a simple accounting software and tracking right from the beginning will save you a lot of headaches down the road)
Creating a Business Plan
Crafting a well-thought-out business plan is vital for guiding your company's direction. Outline your goals, target market, competitive analysis, financial projections, and marketing strategy. A solid business plan not only keeps you focused but also helps attract potential investors or lenders. We recommend considerations the following sections:
Summary of your idea and vision
Description of product/service
Market analysis
Competitive analysis
Marketing/sales plans
Management plans
Operating plans
Financial Considerations
Finances are the lifeblood of any business. As a small business owner, understanding your financial situation is crucial. Keep track of your expenses, revenue, and cash flow to ensure sustainability and growth. Before starting your business, there are a few key questions to ask yourself:
How much “runway” cash do I have to get the business started?
What recurring expenses can I expect?
What revenue do I need to achieve to break even?
What is the average cost of my product or service?
What are my profit margins?
How much does it cost to acquire a customer?
How much time do I expect before making my first sale?
These basic questions can start to fill in your knowledge and help you develop financial plans for a durable business. You’ll also need to familiarize yourself with financial statements, important documents that help you track and report your business’ financial status.
Keeping Your Finances Organized
Working with a Small Business Tax Accountant
As a busy small business owner, bookkeeping might be the last thing you want to deal with. Consider enlisting the expertise of a small business tax accountant who understands the nuances of Canadian tax laws and can ensure compliance while maximizing your deductions.
Selecting the Right Accounting Software
Embrace technology and streamline your accounting processes with the right software. ReInvestWealth's Accounting Software and Copilot, powered by AI, automates bookkeeping tasks, saving you time and effort. The platform also provides valuable insights and reports for informed decision-making.
No matter which accounting software you choose, it’s important to evaluate what’s right for your business. Different options work best for different industries, sizes of business, etc. Considering the cost in terms of time and money is crucial, as bookkeeping really is the foundation of your business!
Planning Your Taxes
Navigating the tax landscape can be overwhelming. Proper tax planning ensures you meet your tax obligations while optimizing deductions and credits. Stay informed about tax deadlines and changes to tax laws that may impact your business.
Understanding Sales Tax vs. Income Tax
Sales tax is a tax imposed on the sale of goods and services, while income tax is imposed on the total income. As a business owner, the difference between the two can get confusing, especially at the beginning of your journey.
In order to charge your clients the right sales tax on your goods and services, you may need to register for and collect Goods and Services Tax (GST), Provincial Sales Tax (PST) or Harmonized Sales Tax (HST). You must generally register for sales taxes when your sales surpass or are expected to surpass $30,000 per year. Ensure compliance with these obligations to avoid penalties. Interestingly, business owners can also request a refund from the government for the sales taxes paid on purchases. If you’re a Copilot user, sales taxes are automatically calculated for you, which cuts down on the need for your intervention.
Keep Accurate Records
Maintain detailed and organized financial records, including income, expenses, receipts, and invoices. Accurate record-keeping is essential for preparing your tax return and supporting any deductions or credits you claim. It’s also going to make your life a lot easier when tax season comes around!
Understand Your Business Structure
Different business structures have varying tax implications. As a sole proprietorship or partnership, business income is reported on your personal tax return. In contrast, corporations have separate tax returns, and profits are taxed at the corporate tax rate.
Know Your Income Tax Deadlines
Familiarize yourself with the tax deadlines for your business type. Generally, the deadline for filing individual tax returns is April 30th, and for self-employed individuals, it is June 15th. However, any taxes owed must be paid by April 30th to avoid interest charges. Plan your year around these dates, and expect to spend some time organizing and submitting your tax returns ahead of the deadline. Corporations must generally file income tax returns every 12 months after incorporation, and have 2 months to pay any taxes owing.
Know Your Sales Tax Deadlines
Just as with income tax, it's crucial to be aware of the deadlines for sales tax submissions. These deadlines can vary depending on your jurisdiction and your sales tax registration. In most cases, sales tax deadlines are monthly, quarterly, or annually. Typically, monthly filers must submit by the 20th of the following month, while quarterly filers typically have until the end of the month following the end of the quarter. Annual deadlines usually fall on specific dates which can be found on your respective taxation website. Note that online businesses may also be responsible for remitting sales taxes, often known as use tax, in regions where they have a significant business presence, or 'nexus'. Refer to our sales tax guide for more details.
Determine Income Tax Deductions and Credits
Identify eligible business expenses that can be deducted from your income to reduce taxable profits. Common deductions include office supplies, advertising costs, travel expenses, and salaries. Additionally, explore tax credits available to small businesses, such as the small business deduction and scientific research and experimental development (SR&ED) credits. Working with an accountant, or an accounting service, can help you identify all the opportunities available for your business, and even end up saving you money! Heads up, Copilot finds tax deductions specifically for your business.
Employment Taxes and Payroll
If you have employees, you'll need to deduct and remit payroll taxes, including income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. Stay updated on payroll regulations and deadlines. Save yourself the headache and take advantage of payroll software to handle all these requirements automatically on every payrun.
Work with a Tax Professional
Engaging a small business tax accountant can be beneficial, especially if your tax situation is complex. A tax professional can offer valuable advice, ensure compliance, and help you maximize deductions and credits. Not only can this help you save money, but also avoid any fines, and plan for the future.
Retain Records
Keep copies of all tax-related documents and financial records for at least six years. This includes tax returns, receipts, invoices, and supporting documentation for deductions and credits claimed.
Remember that tax laws and regulations can change, so staying informed and seeking professional advice when needed are essential to ensuring accurate and compliant tax filings. By maintaining good financial practices and staying organized, you can navigate the tax season with confidence and focus on the growth and success of your small business.
Paying Yourself
As a small business owner, paying yourself is essential for personal financial stability. Determine a fair and sustainable salary, considering both your business's financial health and your personal needs. Understanding how to properly pay yourself is crucial, and will help you avoid legal and tax issues in the future. For many solopreneurs running a corporation, simply withdrawing money from the corporation seems like a simple way of getting paid– however, this choice can lead to consequences down the road!
It’s best to understand and evaluate your options ahead of time, rather than every time you need money. Here are some common methods for paying yourself as an entrepreneur:
Personal Income
As a sole proprietor or partner, your business income is considered personal income. You can pay yourself informally by withdrawing money from your business account for personal use. However, it's essential to keep track of these withdrawals for tax purposes.
Salary or Regular Draws
If you are running a corporation, you can establish a formal salary or take regular draws from the business profits. Paying yourself a regular salary can provide consistency and help with budgeting personal expenses. Regular draws involve transferring a set amount of money from the business account to your personal account at regular intervals.
Dividends (for Corporations)
If your business is a corporation, you can receive payment in the form of dividends, which are distributions of the company's after-tax profits to shareholders.Dividends may be advantageous from a tax perspective, as they are typically taxed at a lower rate than regular employment income. However, it's essential to consult with a tax professional to understand the tax implications fully.
Reinvestment into the Business
As an entrepreneur, you may choose to reinvest a portion of your profits back into the business to fuel growth and expansion. This can be done by allocating funds for business development, equipment purchases, marketing initiatives, or hiring additional staff.
Mix of Salary and Dividends
For corporations, a common approach is to receive a combination of salary and dividends. A reasonable salary helps meet personal living expenses, while dividends provide tax advantages and allow for capital reinvestment.
Important Considerations:
Tax Implications: The method you choose to pay yourself may have different tax implications. It's essential to understand how each method affects your personal tax situation and consult with a tax professional to optimize tax efficiency.
Financial Stability: Pay yourself a sustainable amount that considers both your business's financial health and your personal needs. Avoid taking excessive withdrawals that could strain your business's cash flow.
Separate Accounts: Keep your personal and business finances separate to maintain clarity and ensure accurate record-keeping for tax purposes.
Consistency: Establish a consistent payment schedule to help with personal financial planning and avoid cash flow surprises.
As your business grows and your financial situation changes, your payment strategy may evolve. Regularly reviewing your business's financial performance and consulting with financial advisors can help you make informed decisions about paying yourself as an entrepreneur.
Paying Your Team
If you have employees, manage payroll efficiently. Use reliable payroll software to ensure timely and accurate payment, and to stay compliant with employment standards and deductions.
No matter what stage your business is in, it’s crucial to use contracts for all your staff. Whether you are hiring full-time employees or contractors, you can use contract templates to easily stay safe and well-documented.
Monthly Bookkeeping Requirements
Consistent bookkeeping is key to financial organization. Schedule regular reviews of your financial records to track your business's progress and make informed decisions. Many entrepreneurs choose to leave bookkeeping to the end of the year (or in some cases, years!)-- this can lead to a huge headache later on, and a much larger workload. We recommend starting strong, and topping up with monthly tasks to keep your bookkeeping constantly organized.
These are some of the most important things to consider on a monthly basis:
Record Income and Expenses
Log all income earned from sales, services, or other sources during the month. Track and categorize all business expenses, including purchases, rent, utilities, supplies, and other costs.
Reconcile Bank and Credit Card Statements
Compare your bank and credit card statements with your accounting records to ensure all transactions are accurately recorded. Identify and resolve any discrepancies or missing transactions.
Manage Accounts Receivable and Payable
Keep track of customer payments and outstanding invoices (accounts receivable). Monitor and manage payments to suppliers, vendors, and other creditors (accounts payable).
Payroll Processing
If you have employees, process payroll and ensure accurate deductions for taxes, benefits, and other withholdings. Remit payroll taxes and government contributions on time.
Sales Tax Compliance
Calculate and charge the appropriate sales tax on taxable sales, if applicable to your business. Calculate the sales taxes paid on your business purchases. Submit sales tax reports including remittances and requested refunds to the government as required.
Review Financial Reports
Generate and review essential financial reports, such as profit and loss statements (income statements) and balance sheets. Analyze your business's financial performance and identify trends or areas for improvement.
Budget Monitoring
Compare actual financial results with your budget or financial projections for the month. Adjust your budget or financial plans as necessary based on actual performance.
Organize and Store Documents
Keep all financial documents, such as receipts, invoices, and bank statements, organized and easily accessible for reference and tax purposes. Consider digitizing paper documents for secure and convenient storage.
Although it’s often an overwhelming aspect of running a small business, bookkeeping is crucial. By performing these bookkeeping tasks consistently every month, small business owners can maintain accurate financial records, make informed decisions, and ensure compliance with tax and financial reporting requirements. Regular bookkeeping also provides a clear picture of your business's financial performance, enabling you to identify opportunities for growth and address potential challenges proactively.
An AI bookkeeper, such as ReInvestWealth Copilot, can significantly cut down on the repetitive tasks related to bookkeeping. Without skipping a beat, tools like this can ensure you have a constant record of all your financial information, automated sales tax calculations, and transaction categorization– all of which would take hours of manual work!
Growing a Team
Deciding When to Hire
Expanding your team is an exciting milestone, but it should align with your business's growth and financial capacity. Assess your workload, revenue, and future projections to determine the right time to hire additional staff. It’s crucial to think about this step, as it’s a significant moment for your business and will affect many different aspects. It’s also a financial risk that must be properly considered!
Where to Find Talent
Finding the right talent is crucial for the success of your business. Leverage online job platforms, professional networks, and recruitment agencies to attract top candidates.
Leverage Online Job Platforms
Online job platforms like Indeed, LinkedIn, and Glassdoor are excellent resources for finding potential candidates. Post detailed job listings with specific qualifications and responsibilities to attract relevant applicants. Utilize the advanced search features on these platforms to narrow down your candidate pool based on location, experience, skills, and other criteria. Actively participate in industry-specific forums and groups on social media platforms to engage with potential candidates who have a passion for your field.
Network and Referrals
Tap into your professional network and seek referrals from colleagues, friends, and business associates. Referrals often bring in candidates who are pre-screened and aligned with your business culture. Attend industry events, conferences, and networking gatherings to connect with potential employees who have an interest in your industry. Offer employee referral programs to incentivize your current team to recommend qualified candidates for open positions.
Internship and Co-op Programs
Partner with local colleges and universities to offer internships or co-op programs. This provides you with an opportunity to assess a candidate's skills and fit for the company while offering valuable work experience to students. Many interns and co-op participants turn into full-time employees if they have a positive experience during their internship.
Professional Associations and Trade Organizations
Join industry-specific professional associations and trade organizations to gain access to a pool of professionals with expertise in your field. These associations often have job boards or career centers where you can post openings and connect with potential candidates.
Local Community Resources
Engage with local community resources such as job fairs, career centers, and employment agencies. These resources can help you connect with job seekers in your area. Consider participating in community events or hosting open houses to showcase your business and its opportunities to potential candidates.
Showcase Your Company Culture
Clearly communicate your company's values, mission, and culture on your website and social media platforms. This attracts candidates who align with your company's vision and work environment. Highlight employee testimonials, success stories, and any unique benefits or perks you offer to create a positive image of your company as an employer.
Be Transparent and Responsive
During the hiring process, be transparent about job requirements, salary, benefits, and growth opportunities. Respond promptly to candidate inquiries and keep them updated on the hiring process to demonstrate professionalism and respect. Remember that finding the right employees takes time and effort, but investing in the hiring process is worth it to build a strong and dedicated team for your small business. By utilizing a combination of online resources, networking, and community engagement, you can attract top talent and nurture a thriving workforce that contributes to your business's success.
Creating an Operating System
As your team grows, implement efficient operating systems and workflows to maintain productivity and ensure smooth collaboration among team members. There are many different aspects of your business to consider, and the earlier you get organized, the better. Consider the following elements of your operations:
Streamlined communications
Standard Operating Procedures
Clearly defined job roles and responsibilities
Clear business policies, values, and mission
Overarching business strategy with clear goals, steps, and action items
Clear processes/workflows for all your main business activities that relate back to your overarching strategy
Automation of those workflows where possible
Don’t forget to test, adjust, and change your operations as needed. In the beginning stages of your business, it’s important to try out different solutions and see what works for you and your team.
Finding Resources
Starting and running a small business requires access to valuable resources. Here are some recommended resources for Canadian small business owners:
Government of Canada: The official website provides essential information on permits, licenses, regulations, and financial support for small businesses.
Canadian Federation of Independent Business (CFIB): A valuable resource offering advocacy, support, and benefits for small business owners.
Industry-specific Associations: Joining industry associations provides networking opportunities, educational resources, and industry insights.
ReInvestWealth: Get valuable answers to common questions, free templates and more.
Managing Your Growth
When to Get Professional Help?
As your business expands, complexities may arise. Know when it's time to seek professional advice from accountants, financial advisors, and business consultants to navigate challenges and optimize growth. Networking can even help, and by connecting with professionals, you can gain valuable insights without having to hire any full-time help. You can also look for services which give you access to these professionals, getting fractional support and answers to small but important questions you may have.
In conclusion, running a small business in Canada requires a proactive approach to accounting and financial management. Remember to stay informed about Canadian tax laws, invest in the right talent, and seek professional help when needed. With dedication, the right tools, and the right support, your small business can thrive!
At ReInvestWealth, we’re empowering small businesses for success. If you want to try our accounting solution for free, start today!
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