4 Important Accounting and Tax Considerations for New Business Owners

By Randall Orser | Small Business

If you’ve finally launched your dream business, first of all, congratulations! But somewhere between celebrating and settling down to work, you’ll need to give serious thought to some accounting and tax issues that you may never have had to think about before. Here are four important points to bear in mind as you go forward with your new enterprise.

  1. Bookkeeper vs. CPA (and Why You Need Both)

Many people outside the financial sphere have understandably never felt much need to absorb the various terms we throw around, even the basic ones. For instance, you might not have a grasp of the actual differences between a bookkeeper and a Chartered Professional Accountant (CPA). After all, they’re both professionals who work with small business that need to outsource critical accounting tasks. But there are some important distinctions to be made between these two types of specialists, and ultimately, you’re well advised to make extensive use of both of them for your business accounting needs.

CPA firms tend to take on big, complex issues that routinely plague businesses of all sizes. These may include tax advice and tax return filing, counseling on what type of structure the business should adopt (proprietorship, partnership, LLC, corporation), in-depth financial reviews, and preparations for loan applications. These are the specialists you rely on for major transitions and CRA transactions. By contrast, full-charge bookkeeping firms help you handle those routine but critical day-to-day accounts receivable and accounts payable issues, including payroll calculations, bank reconciliations, journal entries, and internal financials.

Too many businesses try to get by without a bookkeeping firm by simply throwing together a rough approximation of their financial details and handing that to their CPA firm. This places an undue burden on the CPAs, forcing them to work harder and longer to make sense of your books. A CPA’s billable time usually comes at a premium, so you pay proportionately more for their extra efforts. If you’ve been getting by in an effort to save some money, you would be better off hiring a professional bookkeeping firm to handle your financials. You’ll receive smaller bills from your CPA while making better use of your own team’s valuable time.

  1. Structure For Your Business

In Canada, there are three kinds of business structure. Sole Proprietorship (one owner), Partnership (2 or more owners), and Corporation.

With a sole proprietorship, you would be fully responsible for all debts and obligations related to your business and all profits would be yours alone to keep. As a sole owner of the business, a creditor can make a claim against your personal or business assets to pay off any debt.

A partnership is a good business structure if you want to carry on a business with a partner and you do not wish to incorporate your business. With a partnership, financial resources are combined and put into the business. You can establish the terms of your business with your partner and protect yourself in case of a disagreement or dissolution by drawing up a specific business agreement. As partners, you would share in the profits of your business according to the terms of your agreement. If you wish to share profits or losses with your spouse, then you must form a partnership; CRA will not allow a split of profit or losses otherwise.

Another type of business structure is incorporation. Incorporation can be done at the federal or provincial/territorial level. When you incorporate your business, it is considered to be a legal entity that is separate from the shareholders. As a shareholder of a corporation, you will not be personally liable for the debts, obligations or acts of the corporation. When making such decisions, it is always wise to seek legal advice before incorporating.

  1. What Sales Taxes Do You Have To Register For?

In Canada, there are two different kinds of sales taxes, a goods and services tax or GST and a provincial sales tax or PST. Some provinces (Ontario, New Brunswick, Newfoundland, Nova Scotia, and PEI) have harmonized their PST with the GST and charge HST (Harmonized Sales Tax). British Columbia, Saskatchewan, Manitoba, and Quebec have not harmonized their PST & GST so it’s two separate taxes.

You do not have to register for the GST/HST until your sales are over $30,000. However, if you are serious about being in business or have to buy lots of equipment or other goods before starting your business, then register as soon as you have your business registered. This also goes if your sales are mostly business to business. Remember that the HST is just the GST with the PST added onto it; it’s the same tax and is remitted along with any GST you charged.

PST is a tough one as every province has different registration requirements, and on what items they charge PST. Definitely check into the provice where your business is located and see if you need to be charging the PST. British Columbia and Manitoba require anyone selling into those provinces to register for the PST if you sell regularly into that province. Saskatchewan suggests you register, however, doesn’t require it. Quebec only requires you to register if you have an address there, an employee, or operations, such as production or marketing activities.

  1. Employees or Contractors: Which Makes Better Sense for Your Books?

Different businesses like to handle their staffing needs in different ways. Some prefer to keep a consistent team of permanent employees, while others are perfectly content to hire contractors on an as-needed basis. Both scenarios can make sense, but don’t expect to impact your finances in the same way. Here are the respective pros and cons:

  • Contractors — If you’re not determined to keep the same people on the job indefinitely, and you’re willing to keep re-filling it as needed, hiring contractors can be a big money saver for your business. That’s because you don’t have to pay state unemployment compensation, worker’s compensation, or half of the contractor’s Social Security and Medicare taxes, as you would for an employee. You’re also off the hook for many of the standard types of lawsuits filed against employers by employees. On the negative side, you are vulnerable to the personal-injury lawsuits that worker’s compensation is designed to prevent.
  • Employees — Employees usually cost more to maintain than contractors. In return for the job security and benefits you’re providing, you can offer a substantially lower hourly wage for the same work. You may also save on training-related expenses because you only have to train a permanent employee once, as opposed to constantly training an ongoing parade of new contractors. But you’ll also have to pay your portion of Social Security and Medicare taxes on each paycheck, maintain worker’s compensation, and pay state unemployment compensations.

There is no “better” or “worse” in choosing to hire employees vs. contractors; ultimately, you have to weight the financial pluses and minuses against the qualities that will help your business run better (which also affects your bottom line).

If you want to make your new business a more prosperous one right from the beginning, assemble your bookkeeping and CPA team, hire the types of workers most likely to help your bottom line bloom, explore your eligibility for special ACA health insurance options, and talk to your financial team about any upcoming franchise taxes. Get your financial ducks in a row right now, and your business is more likely to enjoy a smoother glide toward success!

About the Author

Bookkeeper Extraordinaire Number Crunchers® Financial Services Learn how to just say stuff it to this bookkeeping thing with our 'Just Say: "Stuff It" To Bookkeeping program.