We have previously covered several aspects around starring a new business in Ontario in parts 1 and 2 of our series, which can be viewed by clicking the following links:
- Creating a business plan
- Selecting and registering a business name
- Choosing a business model
- Obtaining permits and licenses
In the final part of our guide, we will look at the financial aspects of starting a new business, including banking considerations and tax obligations for small businesses. Those involved in new startups are often excited about their prospects and thinking about the money they stand to make, but may not always give proper credence to the money they’ll have to spend to get their venture off the ground. In addition, there are other financial complications including setting up banking to keep business expenditures and profits separate from personal finances and new tax considerations to think about. While many businesses hire someone to manage finances for them, it may not always be feasible when first starting out, so entrepreneurs should have an idea of what to expect financially, so they can be prepared.
Even at the beginning of a new venture, it is wise to keep business finances separate from personal expenses and income. Whether keeping track of loans or other start-up funds, tracking future tax exemptions and liabilities or managing ongoing reporting requirements and payments such as GST, every business owner should take the time to open a separate banking account from the start.
If you are planning on doing regular business in a foreign jurisdiction such as the U.S., you also may want to consider opening a separate account in that country to track income and expenses separately, as the tax reporting requirements will likely differ. The best step you can take from the start is to sit down with an accounting or banking professional and review your businesses financial needs so you can ensure you’re set up to track things properly from the start, rather than having to track payments and expenses retroactively.
Tax Reporting for a Small Business
There are many tax considerations that businesses need to consider and implement, and these will vary depending on the type of business and the business model (e.g. sole proprietorship vs. corporation). When starting a new venture, there is no substitute for a careful and thorough review of your obligations with a professional accountant, however, below are some preliminary issues to consider.
Accrual vs. Income
This refers to the accounting method used to report business income. Most companies will need to use the accrual method, which refers to reporting income as it is earned, regardless of when the cash is received. This means that if your company invoices for services or goods in one fiscal period, but collects on the invoice in another, the income will be attributed to the earlier period. Certain business ventures can use the income method instead (reporting on income in the period the cash is received), however, the allowance for this method is limited to certain types of businesses.
A business is considered a small supplier, and therefore not required to collect or remit HST in Ontario, as long as its earnings amount to $30,000 or less in a single quarter or within 4 or fewer consecutive quarters. Once your business surpasses that threshold, you will be required to charge and remit HST on all taxable income. You can find more information on when and how to register for an HST/GST account here.
Other Tax Considerations
In addition to the above, there are several other issues to consider and determine at the outset of a new business venture, including:
- choosing a fiscal year for tax purposes
- determining legitimate business deductions
- tracking inventory and business expenses
- obligations around reporting and remitting income tax
As mentioned above, the best thing you can do is to sit down with a skilled accountant and review the financial aspects of your business so you know from the outset what you need to do to remain compliant and stay ahead of any surprises. Even if you’ll be managing your business’s finances internally, reviewing the big picture with a professional will ensure you are set up properly from the start and aren’t blindsided by an unexpected expense or tax penalties down the road.
The skilled business lawyers at GLG LLP in Toronto regularly assist corporate clients with a variety of issues, including the configuration and structure of a new or evolving venture in a way that is most beneficial to those involved. Further, we advise and represent corporate clients on related matters including commercial real estate ventures and litigation if necessary. Call 416-272-7557 or complete the online form to arrange a consultation with one of our lawyers today.