Running a business as a sole proprietor is much easier, but allows for a lot of laziness on the accounting side. All you're really required to do is keep track of your earnings, and deduct your expenses and pay personal tax on the difference. When you incorporate, the game changes completely.
One of the first things to realize is that a corporation is an individual - yes, a separate "person". It's not you anymore. Because of this, there are much stricter rules on how corporations are kept track of. You can't just dip in and spend the extra cash, and it's really important to stay organized.
Here's some tips. Some apply to businesses in general, but these are even more critical with an incorporated entity.
- Keep your personal side completely separate. And I mean completely. This means a separate bank account (yes, with business fees), separate credit card, and set of accounting books.
- Be consistent. Use one or two methods only to make purchases. Don't use your personal debit card one day, the company debit card the next, your credit card sometimes, and sometimes the company credit card. And then use your own cash to buy supplies. It just makes a mess for your bookkeeper and encourages a lack of discipline in your affairs. I suggest getting a separate credit card that you'll use only for the company, and write company cheques for things like insurance, legal and accounting services - places that don't take credit cards.
- Keep your receipts and clearly indicate what the item was for. Just having an expense appear on a credit card statement isn't good enough. CRA technically requires both an invoice and a proof of payment for every expense. You need to staple all your receipts to your statement and keep them for seven years.
- If you suck at keeping track of things, hire a bookkeeper. I've spent hours (at accountant's rate) at year-end fixing owner's errors - it's expensive. Use your bookkeeper to update everything monthly.
- Don't make your bookkeeper or accountant call you. Make sure when you send your receipts, invoices and bank/visa statements that it's clear what each item was for.
- Pay your remittances promptly. Don't get behind with Source Deductions - the penalties are stiff. And don't fail to remit your HST. CRA has no patience for this because it isn't like not paying your personal income tax. The HST you collected was never your money so if you "try" to keep it (ie. don't remit it), CRA treats it like stealing!
- Get a professional to do your corporate tax. Yes you are allowed to do it yourself but I don't recommend it. It will end up costing you more in the long run - mistakes, missed items, CRA audits, re-filing.
- Finally, if you decide to incorporate, get professional help. Don't do it online. Seriously. You need articles of incorporation as well as advice on choosing a year-end, a share capital structure, whether or not to register for HST and Source Deductions, and whether you need to do a Section 85 rollover of your sole proprietorship assets (including goodwill) to the corporation. This advice and service can cost you anywhere from $1,500 for a simple incorporation up to several thousand dollars for the accounting and legal required for a Section 85. But the consequences of doing this wrong will cost you many times that amount later on.
Want more information or help with this? Email or call to speak with me personally!
As promised, here's a link to the Globe and Mail article. Happy reading!