5 Easy Steps to Starting Your Sole Proprietorship

Hello. If you are planning to start your small business or you have an existing business or are self employed, there are some essential steps that you need to take to ensure that your new venture runs as smoothly as possible. And in this video I am going to go over five of those essential steps. My name is Veronica Count. I am a cpa, a CFA and the founder of Montreal Financial. I also have a book that might be helpful called Fast start your business where you can take a deeper dive into all of the essential steps and much more. So first of all, when you are starting your business you have to decide what on the type of structure and in Canada, essentially you have three structures that relate to a for profit enterprise and those are sole proprietorships, partnerships and corporations. A sole proprietorship, which is what we are going to be focusing on in this video, is essentially a business that is an extension of an individual. This means you are as a sole proprietorship, you do not have a separate legal entity, but you are simply an individual in business. Therefore you do not have any limited liability and your income taxes are reflected on your personal income tax return on a separate schedule called the T2125. Conversely, you could incorporate your business and the difference is is that you have a separate legal entity. It gives you limited liability, but the tax requirements are a little more stringent because they are for a separate entity. And it's actually relatively everything I'm going to share with you in this video is pretty easy. Okay, so tip number one for sole proprietorships is you should in most cases register your business. And keep in mind that a business registration is separate from income tax. It's separate from sales tax. It is simply a regulatory requirement. And the rule is that if you are using any name other than your first and last name, you should register your business. Business registration in Canada is done at the provincial level. Level. That means you would find the provincial body that allows you to register your business as a sole proprietorship and go through the steps. Mostly you can do this online in a couple of provinces, you can't. Again, if you're using anything other than your first and last name, you are required to register. And this includes websites, it might include social media handles. Those are things to take into consideration. If you are known by anything other than your first and last name, I would register. And in fact my advice is to register regardless, even if you're only using your first and last name because it gives your business credibility. You give you get an actual number, you can demonstrate that you were an official business and if you're ever audited, then you can prove to CRA or Revenue in Quebec that you are a proper business. Step number two is to determine whether you have to register for sales taxes. And that includes GST HST in all of Canada. And in Quebec there is also a QST component. So the rules for the registration of GST HST are if you have made or generated $30,000 of revenue or sales in the past four quarter period, then you are required to register. This means you have to do a quarterly calculation and determine if you have reached that thirty thousand dollar mark or if you're getting close to that thirty thousand dollars mark. So, and then make sure that you register. You can.

If you are anywhere in Canada but Quebec, you would do this through cra, my business account. This is laid out in my book in greater detail, but all of it is also readily available on Google. If you're in Quebec, you actually have to register for GST and QST with Revenue Quebec. And this can also be done online. This is all relatively simple to do. There's also nothing to stop you from registering for GST, HST and QST at $1. And there's advantages to doing this, including you seem a little more professional because you were charging sales tax. If you're not charging sales tax, people will immediately know that you are generating under $30,000 in revenue. On the flip side, so you do have a competitive advantage because your prices might be lower by 15%. But this is only important if you're selling to consumers. If you are selling to other businesses that are reg registered for sales taxes, keep in mind that they can claim back the GST and QST and HST that they pay to other businesses as long as they're registered. And that goes the same for you if you decide to register. And this is a very strong reason to register is if you expect high startup expenses because you can claim back the gst, HST and QSD that you pay on startup expenses. Okay, so step number three is as soon as you have started your business is to set up a separate bank account and a separate credit card. I cannot emphasize this enough and there are many of you who don't even think about this understandably, or this is not your area of expertise, but it is going to make your life so, so much easier. And if you have registered your business, you will get a business number. I do recommend setting up a business bank account because this gives you a little bit of additional functionality. You can do your taxes on your sales taxes online using Something called business tax filing. This is only possible with a business account. And also again, it goes to further establish you as a business and if you're ever questioned, but at the very least, even if you don't have a business bank account, at the very least have a separate account that you use exclusively for business. Similarly, you should set up a separate credit card for your business. It doesn't have to be a business credit card. It could just be a credit card that you're not using or that you, you delineate exclusively for business. Or oh, like you know, the occasional expense that, the occasional charge that for personal purposes. But it, for the most part it should be as much as possible for your business. And the other advantage, the huge advantage of having separate accounts is that it's almost like a rudimentary accounting system. You could look at the balance in your accounts and see exactly how much you have in the bank, how much you owe in your credit card. You can make transfers between the two. It is self contained and you can export the transactions if you're using a spreadsheet or you can download them for if you were using accounting software. Which brings me to tip number four, which is to determine and set up your accounting as soon as possible possible. And generally speaking, you have two options. You can either use a spreadsheet or you can use a accounting software. And it depends on your business. When you're first starting out, you may not want to incur the additional expense software. You can simply use Google Sheets or Excel. These are free or low cost. And what you want to track and what is essential to track are your sales, your revenues and your expenses. And for the expenses and so on the spreadsheet you want to record every single sale and every single expense. Put the date, put the name of the supplier, the amount. If you are registered for sales taxes, you want to separate out the sales taxes. This is really important because you have to reflect this on your sales tax return when it comes time to do that. And so a spreadsheet is fine, especially if you don't have a lot of transactions. If you're a service based business or a freelancer, this works very well for many of you. However, if you do have a lot of transactions, or if it's important for you to analyze your business, it's important for you to be able to look up history. Or if you have inventory that you want to track, then going for accounting software can be very, very, very beneficial. There is so much that you can do with accounting software and it can be a Huge time saver. Additionally, if you have separate accounts for your business, which you absolutely should, you can download your transactions, you can connect your bank accounts to your accounting software, download the transactions and it makes the data entry significantly easier. It takes hours out of the data entry and in fact for some of you, you could just spend an hour or two on a monthly basis on your accounting and you were done with accounting software. So if your time is valuable, if you don't have a lot of time paying the $50 or so per month for something like QuickBooks Online, there's another accounting software called Xero. Some of you use Wave, there's also FreshBooks. There's a bunch of different accounting software out there. My preference is QuickBooks Online only because I' using it for a really long time. And it's a robust comprehensive accounting software with a huge ecosystem of apps. So depending on your business, you can connect all kinds of apps to it. And finally, tip number five relates to income taxes. So it's very important to note that income taxes are completely separate from sales taxes. You collect sales taxes from your customers and then after the end of every quarter, at the end of every year, you remit them to Revenue Canada, or if you're in Quebec, you remit them to Revenue Quebec. But income taxes on the other hand are taxes that you pay on the profits that you earn in your sole proprietorship. So the formula is very simple. It's basically you take your total sales less your expenses and that results in your profit. And then the income taxes that you pay will be based on your average and marginal tax rates. I do have a video on marginal tax rates that you can take a look at. But essentially you will have to pay taxes on your profit. And so therefore you want to make sure that you are prepared and that when you do have profits, you take a percentage of that and put it aside. You could set up a separate savings account. That's a great way to be disciplined and make sure you don't spend that or be caught off guard at the end of the year with a significant tax bill, you could put aside 25 to 45% of whatever your profits are. And to get a better sense of what your tax amount might be, I always recommend the Wealth Simple Tax Calculator. It's a great tax calculator. I use it all the time. You would plug in your self employment income along with any other sources of income to get a sense of how much tax you will owe at the end of the year. And then you would want to put that aside. So those are my five essential tips for all sole proprietors. Whether you have just started or you are relatively new, I think your business can significantly benefit from from these tips and as you have seen, they are quite simple to implement. If you have any questions, please leave a comment and I will try my best to answer it. And also, once again, if you are interested in learning more, my book Fast Start your Business explores all aspects of starting your new small business. So I encourage you to take a look at it and if you found this helpful, please like and subscribe. Have a great day.