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Starting Your own Business
When launching your own business, you will need to choose the legal form of your operation. You can structure your business in several different ways.
Two popular types of business models are the sole proprietorship and the corporation, each suited to different types of businesses and phases of development.
Other less common business models include partnerships and limited partnerships, however, you should meet with your accountant or lawyer to determine whether these less popular models are suitable for you.
Sole proprietorship is the least complicated business structure. As sole proprietor, you are the business. You can operate under your own name, or you can register a business name at the Companies Office for a fee.
For example, I could use “P.J. Richer Plumbing” without registering because P.J. Richer is my own name. If I wanted to operate as “Swoosh Plumbing”, I would have to register the name.
If you decide to register a business name, you will be required to renew the registration every three years. Regardless of whether your name is registered, you will also be required to register with the Canada Revenue Agency (CRA) for a GST (Goods and Services Tax) number and with Manitoba Finance for a PST (Provincial Sales Tax) number. We strongly recommend that you also consult with an accounting professional at this stage.
The most significant advantage to operating as a sole proprietor is that you can keep your costs low. If you plan to operate on a shoe-string budget during your start-up phase, sole proprietorship will likely be your preferred method. Sole proprietorship is also appropriate if your income will be limited.
For example, your business exists simply to supplement your main employment income. When your business generates enough income to bring you into the highest tax bracket, you should consider incorporation. Talk to your accountant!
The largest disadvantage of sole proprietorship is that you and your business are the same entity. No legal distinction exists. This means that all of your assets including your car, home, and cottage are available to satisfy any judgements in the event you are successfully sued. While lawsuits do not occur often, when they do, your legal costs, resulting damages, and the time away from your business can have devastating effects on your financial reserves.
Once your business starts earning income, or if liability is an issue, you may wish to incorporate. Incorporation serves two major purposes:
- Incorporating your company creates a new legal entity separate from you, the individual. If the entity, or corporation, is found liable, you, as shareholder are not. This will protect your personal assets, such as your home, vehicle, and RRSPs.
- From a tax perspective, you can keep the money earned by the corporation within the corporation. Currently, in the Province of Manitoba, earnings under $425,000.00 attributed to a Canadian-controlled private corporation are taxed at 11%. This amount increases on January 1st, 2016 to $450,000.
This is a legitimate way to defer taxes.
The biggest disadvantage of incorporation is cost. While tax deferral is appealing, you should consult with an accountant to ensure you are fully aware of the consequences of the decisions you make. While you will be deferring taxes, you will also be incurring annual legal and accounting costs, and if your income is low, any tax advantages will be lost.
Buying or Selling a Business
Rather than starting your own business, you can purchase one already operating. This can be accomplished by buying all the shares of a corporation (provided the business is already incorporated) or, you can buy the assets.
In a Share Purchase Agreement, the purchaser buys all the shares of an existing company from the vendor (provided the business is already incorporated). The merits of a Share Purchase should be thoroughly discussed with your accountant. The largest advantage of this type of agreement is usually one of cost. Firstly, you can save money on sales taxes and land transfer tax. Unlike an Asset Purchase, the province will not charge you sales tax on the purchase of hard assets (such as equipment) or the land transfer tax when you buy real estate. Another advantage is that when you purchase a corporation, you buy the entire company, including debts and liabilities. Debts and liabilities usually lower your purchase price.
In a Share Purchase, control of the company changes. The company itself still exists as a separate legal entity, and as far as the law is concerned, it is business as usual. The same company owns all of the hard assets and real estate, therefore assets did not change hands.
The main disadvantage of a Share Purchase is that you will be assuming all of company’s liabilities and potential liabilities. While this does not mean that you will be personally liable, a lawsuit could have devastating effects on your investment. A properly drafted agreement would include an indemnification requiring the previous owners to reimburse you, but this may prove difficult to enforce if the vendor no longer has any assets, especially if the vendor is itself a corporation.
If you are concerned about ongoing liability for decisions made by the previous owners, the Asset Purchase is a better option. The purchase cost will usually include goodwill as well as hard assets such as equipment and real estate. Allocating the price between these different components becomes important because the price allocated to equipment is subject to PST. This is where consultation with an accountant is valuable.
That being said, asset purchases are generally more costly upfront. If the assets include real estate, the purchaser will pay land transfer tax on the fair market value of the property. The vendor may incur costs related to depreciated property.
Always remember that when you purchase a business, you also have to consider employees. From an employee’s perspective, although ownership of the company has changed, the employer has not. Dismissing long-term employees can have serious consequences: you may be liable for compensation covering one year or more of an employee’s salary.