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Your Tax Options For Going into Business for Yourself

Tax season is over, and I’m happy to report that I was left owing $1,800 to taxman. No surprise though, my income rose 23% over the same time last year. I was pretty impressed, hence for not being surprised that I’m owing. But, after ever tax season, I’m often wondering how can I improve for next year?

Self employment is the answer, and whether you choose to go full-time or part-time, self employment can be big help to help to elevate a healthy income.

Choosing what you do for self employment part-time or full-time is not as important, as long as it’s legal. You can offer a service or a sell a product, the choice is yours.

There are benefits to self-employment, which will be discussed in this post. Enjoy.

Tax Break

Anytime you run a business you’ll be entitled to claim a deduction for any expenses incurred to earn income from the business provided the amount is reasonable. The types of expenses can vary by the type of business, but there are some common expenses that are often claimed such as office expenses, rent, advertising and so on, and other expenses are unique depending on the type of business you own.

Here’s a quick list of things to consider to claim as expenses:

  • Advertising
  • Promotion
  • Meals/Food
  • Entertainment
  • Memberships
  • Subscriptions
  • Office Supplies
  • Employee Expenses
  • Home Office
  • A portion of your mortgage interest
  • Rent
  • Property Taxes
  • Telephone
  • Internet
  • Repairs
  • Vehicles expenses such as oil changes and gas, repairs, car washes etc..
  • And many other expenses depending on the type of business you operate.

There are three common tax structures to consider when starting any business: Corporation, Proprietorship and Partnership.

Let’s look at each option a little more in depth.

1. Proprietorship

This is when you’re in business by yourself, for yourself. This is the simplest structure out the the three to use because it’s as easy as letting others know you’re in business. There is little government regulation, and it’s low-cost to set up of $75 to register a business name is very inviting. The drawbacks of a proprietorship include unlimited liability for the obligations of the business. In other words if your business get’s sued, you’re technically getting sued.  At tax time, any income you brought in through your business  is reported on your personal tax return (Form T2125). There are generally fewer opportunities for creative tax planning in you’re a sole proprietor.

2. Partnership

A partnership arrangement is simply two or more partners carrying on business together with a view to creating profit. The benefit of partnerships can include a pooling of the skills of different individuals and perhaps access to more capital to start and grow a business. The partners are often jointly and liable for the obligations of the partnership. Unless you structure limited partnership, any hiccups by your partner or partners, you’re essentially on the hook. Any income at tax season, including losses is divided amongst the partners  to be reported on their personal tax returns. Choosing your partners carefully is critical, and a written partnership agreement is a must.

3. Corporation

A corporation acts as a separate legal entity and is treated seperate from you for tax purposes. Incorporating your business gives you additional tax planning opportunities. A small business corporation is often entitled to a “small business deduction” which results in the first $500,000 of active business income being taxed at just 11 per cent federally, plus provincial taxes, putting the average tax rate at about 15 per cent. This is probably one of the biggest benefits of creating a corporation. As a general rule, if you expect to incur losses in your first years of business, you may be better off operating as a proprietorship so that those losses can be applied against other income you might have. Incorporating generally makes more sense once you’ve grown in size and profitability.

Thanks for reading, and wishing you nothing but the best with your business endeavours.

Eddie

There Are Advantages to Incorporating Your Cleaning Business

 

Much like any other small business, mine started with one person (me), the idea to start a cleaning business and a strong desire to diversify my income stream by creating multiple income streams. A few months of planning, research and my cleaning business was born – Father & Son Cleaning Services.

Since I was the lone ranger in my newly formed business, my company structure was a sole proprietorship. This also happens to be the simplest of business structures.

Like most entrepreneurs with big dreams often don’t wait too long before expanding into incorporating their business. A few years (or months) of steady growth and a plan to continue to expand the business is more than enough incentive to incorporate your cleaning business.

Despite that incorporating a business comes at a stiff price, there are quite a few benefits to incorporating your cleaning business. And if you’re looking to take your cleaning business to the next level, grow it, and hire staff – a corporation is the preferred structure.

If you’re like my self still and own a cleaning business, you are still operating as a sole proprietor. A sole proprietorship is when the entrepreneur directly owns all of the assets and is personally responsible for all the debts and liabilities. The big advantage of being a sole proprietor is the simplicity, especially when it comes to paperwork.

However, if you’re planning to grow your cleaning business, hire more staff and gain more credibility, incorporating your cleaning business may be right for you due to added benefits:

  1. Ownership stakes are easier to transfer.
  2. Owners benefit from limited liability.
  3. The life of the corporation can extend beyond that of the founder or founders.

One of the most attractive advantages of a corporation is that it acts as a separate legal entity and owners do not own its assets directly. Instead, they own shares in the corporation, which in turn owns the assets. And in the future if you’re looking to sell your cleaning business, transferring ownership stakes are much easier.

Incorporating your cleaning business comes with a limited liability, which essentially means the owners are not personally responsible for the obligations or acts of the corporation within legal limits. Potential losses are limited to the amount invested in the corporation, except if the owner has provided a personal guarantee, which many banks require.

The other key advantage that incorporated businesses have is that they benefit from a theoretically unlimited life. When shareholders die, their shares are willed to their heirs or transferred through a sale. Sole proprietorships, on the other hand, automatically dissolve when their principals pass away.

Despite  so many advantages to incorporating your cleaning business, one small downside to being a corporation is the additional cost and effort. A corporation must maintain a separate set of accounting records, separate from the owner.

Corporations must also pay annual registration fees, and must file separate financial statements and tax returns.

A typical tax return for a sole proprietor (like my cleaning business) runs me roughly about $100 every tax season. This includes the filing of my own personal tax return as well.

A corporations tax return will run in the few hundreds of dollars and sometimes up to a thousand dollars. This is simply due to the extra paperwork and complexity of completing a tax return.

Despite a little more paperwork and extra costs, it’s worth it to incorporate your business. There are much more benefits versus down sides. Plus you can write off your tax preparation as an expense.

PCI