What an amazing time in life! You have a fabulous business idea, you have the skill to pull it off, and you are going for it! Your family and friends are all behind you and you are ready to start.
Off you go…
Things start really well, you gain momentum as word of your product or service reaches beyond your personal circle. You begin to focus on delivering to your customers and you are doing a great job. Money is coming in from work completed and you are paying your bills. There is still money left over and you happily help yourself to it. There is some stress but you are in control of your time and schedule and it feels really good.
You become so busy running your business that you pay little attention to any government reporting that might be needed. In fact, you are doing so well that you really need some financial assistance from a bank so that you can expand and grow.
Then it happens…
The bank is looking for financial reports but you don’t have any because you have not really set up or maintained a financial reporting structure for your company. As long as you had cash in the bank to pay your bills and pay yourself you thought all was well. The bank insists you find an accountant and you quickly discover that you have reporting requirements to the Canada Revenue Agency (CRA) that you knew nothing about. You are now several years behind in filing tax returns with CRA and you owe them money. How can that be? There is no money in the bank account! It is at this stage that many small business entrepreneurs find there is no way out and walk away from their dream business.
This is what we refer to as the Tax Trap.
This does not have to be your story. There are countless success stories of entrepreneurs who have done it right and you can be one of those stories!
What can you do to ensure you do not fall into the Tax Trap?
Below is a list of items for you to keep front of mind as you begin and grow your business:
- Work with professionals from the onset: lawyers, accountants, bankers. Establish your team at the very beginning and allow them to grow with you;
- Establish the criteria best suited for you to determine when you will switch from being a self-employed business to an incorporated company;
- Work with your accountant to understand the requirements for registering for items such as employer remittances for payroll, HST/GST, Workplace Safety Insurance Board (WSIB), Employer Health Tax (EHT). These all impact businesses whether the business is incorporated or not and it is important that you understand the reporting and payment requirements of each;
- Work with your accountant to establish a bookkeeping system that is maintained monthly;
- Ensure you separate your finances so that your business has its own bank account and credit cards and there are no personal use purchases or withdrawals from these accounts;
- Ensure you keep all your receipts in an organized manner either electronically or in paper format. There are many apps that have been developed that can assist with this, especially when used together with an accounting software package. It is most efficient to work with a credible bookkeeping team to ensure you stay current;
- Work with your accountant to ensure you are adequately tracking expenses that often cause conflict with CRA such as business use of vehicle, business use of home, meals and entertainment and travel expenses;
- Ensure you retain all your accounting records and receipts. CRA can request documents for the past seven years.
Professionals can keep you on the right track and they are your resource for information to keep your business financially healthy. Establishing your team from the onset is critical to your long term success.
Investing in the right team and infrastructure at the start will not only allow your business to experience healthy growth, it will save you money over the long term and may even save your business by enabling you to avoid the Tax Trap.
Have you already been in business for some time and feel you may be falling into the Tax Trap? There is still time, it is never too late to structure things appropriately going forward.
Please reach out to us as professional accountants to assist you in this area. We would be pleased to form part of your team. For more information on this topic, contact your McCay Duff advisor.