Small Business Tax Know How for Ontario Businesses
You are starting out and in a state of flux – should you incorporate or not? The below blog I am going to share my thoughts on when is the RIGHT time to take the leap.
The Decision to Incorporate
Most small businesses start out as unincorporated. This simply means that you don’t make the business its own entity. You (and perhaps your spouse or partner) are the business. Being a sole proprietor or partner has its pros and cons. As an unincorporated business, you assume all the debts and liabilities personally as opposed to corporations, which hold owners liable only up to the extent of their investment. Corporations face increased formalities tax wise as well as more complex paperwork when it comes to shareholders, directors, and changes in address. The decision to incorporate should be made only after extensive research. Reach out to government offices, small business groups, and other entrepreneurs in your area.
Income Tax and the Sole Proprietor/Partner
For unincorporated businesses, income tax is fairly straightforward. Your business earnings minus your allowable business expenses are treated as personal income. If you have always been employed by someone else, you’ve gotten used to income tax coming directly off your pay. As a new small business owner, your income tax owing is due all at once your first year. Depending on the amount, you may also be required to submit instalment payments to CRA in advance in following years. It’s a good idea to look at your monthly earnings and set aside a portion to account for the big tax hit that may come in April.
Depending on the size and nature of your business, you may have to collect GST/HST from your customers. The amount you collect minus the amount you spend to run the business (utilities, supplies, etc.) is sent to CRA. Strict collection and remittance requirements must be followed. Thankfully, the Canada Revenue Agency offers plenty of guidance online for the newly self-employed.
Now, you have the various scenarios to make the right choice for your business. If I can serve you and be of any help, feel free to give us a call or book a complimentary assessment.