You have a great idea, product, or service and you want to start a business so that you can get your product out to the masses. You start doing your research, get connected with the right individuals, and come up with a plan to start your new venture. You know what, that makes you an entrepreneur.
Before any entrepreneur or start up business owner begins to think about anything else, they are focused on getting the business off the ground. That includes having a great marketing campaign, setting up meetings for networking, generating sales, focusing on operations, and ensuring the goods and services are up to par. To be frank, generally the last thing on the mind of an entrepreneur during the start up stages is the accounting and tax side of things. And that makes senses. Before worrying about paying taxes, you have to first worry about generating sales.
However, there are a few items that an entrepreneur/start up business owner can consider early on that may benefit them greatly once they get their business up off the ground.
First of all, to protect oneself from legal liability, their intellectual property and concepts, it may be a good idea based on where you are at in your business to incorporate and patent/copyright your business and intellectual designs and concepts. Protecting your logo, brand, concepts may be a great idea to do early on before you run into issues later as your product and brand develops & matures. Furthermore, incorporating can protect your personal assets to a certain degree from legal liability in the event your business runs through some financial difficulties.
From an accounting and tax side, incorporating has some great benefits such as having access to a lower rate of tax, income slitting opportunities, opportunities to reinvest without paying taxes, and other tax planning opportunities.
In most cases, if you incorporate your business, as a Canadian corporation, you will have access to the small business deduction whereby you will be taxed at the lowest rate of 15%. The best part for the start up company is that you will not be taxed personally unless you take funds out of the company as a dividend or salary. And what that allows, is that you can leave the profits in the company that will be taxed at 15% to reinvest into the business and begin other campaigns or projects. If you compare this to running your business as a sole proprietor, you will be taxed at the personal tax rates on the entire income earned at the various tax brackets which may result in paying more than 15% noted above.
Start ups and entrepreneurs incorporating early should consider offering different classes of shares to their spouse, or 18+ children. Setting up the corporation properly early on helps avoid dealing with the headaches later on as the business matures and gets to start issuing dividends to family members who may otherwise not earn as much income. There are other tax planning opportunities such as setting up holding companies, etc. which we can get into further at another time.
Before thinking about tax structures and incorporating, etc., it is best to consider where you are with your venture. If you are not generating sales yet and still working on the plan, it may be best to avoid incurring legal and accounting costs just yet. However, if you have a viable business and are confident about making your business a success, it may be a good idea to spend some time thinking about the best way to set up your company and incur those costs up front sooner rather than later once the business grows.