Many businesses are going through hard times due to the Covid-19 pandemic, but nothing can stop an entrepreneurs from making their dream a reality. In this article, we provide step by step guide on how to set up a small business in Canada:
At first, starting your own business may seem exciting and a lot of work as the process is quite overwhelming. However, if you follow this guide and take it step by step, you will get through the entire process. The steps provided below do not have to followed in order, you can complete any step at any given time.
Start with a good business idea
Create a business plan
Choose a catchy business name
Decide on structure of your business
Apply for business loan
Obtain necessary licenses
Register your business with CRA
Purchase business insurance
Be prepared to hire employees
Keep good records
Promote your business
Now lets talk about each step into details.
1. Start With a Good Business Idea
Every successful business starts with a good and unique idea and sometimes this can be the difficult part of starting a business. You should start with reviewing your talent and skills to choose a line of business that could become a basis of a profitable business. Furthermore, you will need to study current marketplace and look for ways to to improve upon existing ideas. This can be way of coming up with new and different ways to offer your products or services than your competition.
2. Create a Business Plan
Many business owners start their business without a business plan which can be very risky. It is highly recommended that you have a complete business plan to guide you before you launch your business, however, in the early stage, a simple plan is enough to start with the process.
Business plans are a challenging startup step for many small business owners who are presenting their business ideas to investors or lenders for funding. Many startups fail because the assumptions used are too optimistic or are not based on the current market conditions. An accountant can help you create a thorough and complete business plan that is based on realistic information so that you start on the right track.
3. Choose a Catchy Business Name
When you're starting a new business, it is crucial that you choose your business name very carefully because of the legal and marketing considerations.
In terms of marketing, you want to choose a name that is catchy and memorable to the potential customers and generally, you want a business name that's suitable for marketing purposes. This means that your business name should fit well on marketing material as well as social media and catches attention painted on the side of a business vehicle.
Your business name must also comply with the law and every business owner will have to consider legal elements when naming their business. Sole proprietorships are placed with less name restrictions than corporations, but at minimum will have to register their name with the government.
4. Decide on Structure of Your Business
When starting a business in Canada, another crucial step is to choose the right form of business ownership because the business structure will determine how it's taxed and organized including the management of funds. There are only three forms of business ownership in Canada:
Sole Proprietorship
Generally, a sole proprietorship is an unincorporated business owned by one individual. It is the easiest and least expensive form of business to set up and operate. This form of business is much simpler to operate because all business income is reported on your personal tax return and there is no need to file separate corporate tax return.
On the other side, sole proprietorship is not a separate legal entity, making it a risky form of business from legal perspective. This means if your business fails or if lawsuit is filed, the creditors will come after your personal assets including taking away home, vehicle, equipment and any other asset you have.
There are several advantages and disadvantages of running a business as sole proprietorship. However, if you business expose you to high level of liability, this form is not appropriate for business.
Partnership
A partnership is formed when two or more legal entities (individuals, corporations or trusts) put together their resources to operate a shared business. In partnership, each partner share the same level of risk and business responsibilities are manages and shared equally among all partners. There is no need to file separate corporate tax return, making it simple to report on taxes.
There are several disadvantages of forming a partnership business: high risk of conflict among partners, problem with buyouts (when one partner decided to leave the business), one partner can be held liable for the actions of other partner.
In Canada, there are three types of partnership:
1. General
2. Limited
3. Limited Liability
Many small business owners start a partnership without considering the legal elements and end up failing due to lack of understanding and written contract. If you are starting a partnership, we recommend that you must have a written partnership agreement in place regardless of the type of partnership you are forming. We have seen that partnerships with proper legal documents tend to do well compare to the one without a written agreement as the agreement ensures that all partners are on the same page about the business and their duties.
Corporation
A corporation is a sperate legal entity with limited lability. This means that the owners are not held responsible for the debts or labilities of the corporation. If your business needs funding, forming a corporation can help you get the money required to start and grow your business. Shareholders or owners of the corporation can choose to pay themselves in the form of salary or dividends, allowing you to maximize tax savings. Interested to learn more about how to pay yourself? Read our article Salary vs Dividends: How to pay yourself from your corporation
If you decide to operate your business via forming a corporation, you'll need to incorporate your company in Canada first. There are two basic type of incorporation: Federal or Provincial. Both types have its own advantages and disadvantages. Choosing to incorporate federally or provincially depends on many factors including, the short and long term goals and plans of the corporation, location in which the business will operate, etc.
Provincial incorporated company has the right to operate under its company name in a specific province. Whereas, if you incorporate federally, you have flexibility to operate your business under its company name in any province within Canada, however, you'll still have to incorporate provincially as well. For example, federally incorporated companies will be required to incorporate their business in the province they want to operate their business.
5. Apply For Business Loan
Although many new small business owners may be able to finance their business out of their own savings, few others need money from other source to start a business.
If funding your business out of pocket is not an option, consider borrowing money from your family and friends as a business loan. In general, these type of loans are more flexible and will end up costing you less than if you were to obtain financing from other sources like banks. However, if both of these options are not available, then consider getting small business loan or borrow money from banks. Finally, your business may be eligible for government grants.
Whichever option you choose, be sure that you fully understand the difference between each type of financing including obligations and be sure to read footprints in the agreement before signing it.
6. Obtain Necessary Licenses
Many small business owners will need to obtain business license before they can legally provide goods or services within their municipalities. There are very few businesses that do not require a license so be sure to do your homework before you put up a Open Now sign.
Besides from meeting government licensing requirements, you may need to obtain other permits and licenses to operate legally. BizPal is a useful tool to find out what type of licenses and permits are required for your business.
7. Register with CRA
Be sure to register your business for Canada Revenue Agency (CRA) accounts. If you're starting a business or are self-employed, it is important to understand about sales tax requirements and implications for your business. If you or your business will be selling goods or services to the consumer, then you might be required to register for a GST/HST account and become a GST/HST Registrant. This means you’ll be collecting and remitting the sales tax to the Canada Revenue Agency on a monthly, quarterly or annual basis.
You are not required to register for GST/HST if your small business's gross income stays under $30,000, but you may want to register for GST/HST immediately to claim refund for the sales taxes paid out on purchases for business use.
You will also need to register with CRA for payroll account if you pay yourself in the form of salary or if you plan on hiring employees.
8. Purchase Business Insurance
Small business owners are legally required to obtain employment insurance and may need additional protection. So if your business needs additional coverage to protect your business and clients, consider getting a business owners policy (BOP) which is designed for small businesses. There are number of insurance policies available in the market so be sure to discuss these options with your insurance agent to determine which ones suit your needs.
9. Be Prepared to Hire Employees
In the early stages of your business, you may not think to hire employees and it may be the furthest thing from your mind. However, sometimes things pick up very quickly and therefore, you may want to plan ahead to ensure that you meet the legal requirements and you're prepared to hire employees in Canada. Once you've hired people to work for you, one of your responsibilities as an employer is to pay them properly and comply with CRA guidelines. Read our article to find everything about payroll deductions and more: How to Run Payroll for Small Business in Canada
10. Keep Good Records
As a small business owner, tax preparation begins the moment you make income through the business. If you want to claim all the deductions and credits available for your business to maximize tax savings, you need to provide backup supporting documents to CRA in case your business gets audited. We recommend that you keep complete record of business expenses including keeping electronic copies of scanned receipts along with hard copy to stay organized. Some small business owners even leave notes on the back of their receipts to serve as reminders. This will save you time and money in the short and long run.
11. Promote Your Business
Now that you've worked very hard to organize and start your business, the next most crucial step is to market your business. Every business needs to have a strong and realistic marketing plan which can be part of the business plan. If you want to get your business off to a good start, put your marketing strategies into action.
If you are planning on starting a business and still have questions about the process, reach out to us and we will be happy to help. We have helped many Canadians entrepreneurs launch their business successfully. We provide exceptional customer service and complete system support with every step of the way to ensure your business is off to a great start. We offer free consultation!
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