Financial tips for starting your own business

Money considerations for would-be entrepreneurs

Whether you’re just starting out and want to set your own path, you’re looking for a mid-career change, or you’re up-ending the notion of a traditional retirement, launching your own business can be an enticing prospect. But when it comes to your finances, there’s more to becoming your own boss than meets the eye.

The decision to make the leap into entrepreneurship is a big one. Every year thousands of new businesses are created and less than two-thirds are still in business five years later. Each one began with a dream. Beyond passion and enthusiasm, those that achieved success did so by making a plan and paying attention to details.

Taking the first step

As you start to contemplate the idea of starting your own business, here are a few things to consider.

The buck now stops – and starts – with you. Are you ready for that?

Hard work, dedication and passion all go into creating and operating a business. It isn't for the faint of heart. You'll need to be ready to make sacrifices and shoulder the responsibility for solving problems. Before you get on the path, make sure you have the fortitude to stay on it.

Make your elevator pitch

The term “elevator pitch” was coined to refer to the length of time it took after buttonholing a potential investor to pitch your idea – usually within the 30-second elevator ride up to their floor. Elevators aside, you'll need to be able to describe your business, define your market, demonstrate why you're better and explain exactly how you'll make money. Make it simple, because you'll need to repeat it…a lot.

Do your research

No matter what type of business you're starting, you'll need to know the industry you're in and the competition you're facing. Above all, you need to be absolutely certain there is a market for your business or service. Then think about how you'll operate. If you're a consultant, will you need an office, and can it be in your home? If you're going into retail, investigate locations. If you're going to manufacture a product, how will you do it and where?

Assemble a support team

Whether you're going solo or you're in a partnership, you'll need help making the right choices. Our business advisors are a great source of practical information and advice. They'll be able to help you set up a solid financial framework and establish financing options like loans or lines of credit as well as assembling a business advisory team to help with insurance and other issues you'll need to consider. They can also help you find an accountant and a lawyer (you'll need them, too). And one last thing – you should develop a mentor network of seasoned people in your line of business who can answer industry-specific questions.

Decide your organizational structure

Will you be a one-person show or have employees? Will you be a sole-proprietorship (100% yours, all earnings taxed as personal income), a partnership (share the wealth, share the pain), a limited or incorporated company (liability protection, lower tax rate and more control on taking money out of the company) or a co-operative. You should think carefully about incorporating; depending on your situation, it may not be to your advantage. Get advice on all the implications, particularly tax.

Choose and register your name

It's important. Take the time to think about it. Make sure it doesn't conflict with an existing trademark. Online government services can help you register the name and help you acquire a CRA Business Number. Make sure you get the legal paperwork straight for any permits or licenses you might need. If a web presence is important to your new business, secure the domain name and related social media handles.

Write a business plan

This is a crucial step and should begin as soon as possible. Depending on the type of business you're starting, it may be very detailed. Several online resources can provide examples of various types of plans. In general, it should provide an overview of your business, describe its products or services, and provide an industry overview to identify target markets. It needs to demonstrate viability, outline an operations plan and provide a comprehensive financial plan. This is where your business advisor can add value, helping you with expense and revenue estimates.

Insure your success

Don't shortchange yourself or your family by ignoring insurance. Your business advisor can help you investigate coverage that protects, at the very minimum, property, liability and business interruption. Our insurance specialists can become part of your business advisory team.

Working for yourself: what’s different?

Self-employment has a number of financial advantages. For one, you don’t have to pay into federal Employment Insurance if you don’t want to. Then there are the potential tax benefits, from having a wide range of deductible expenses to splitting business income with family members.

What you do need to be aware of, however, is that as a self-employed person, you’ll be on the hook for both employee and employer Canada Pension Plan premiums. Remember that you will no longer have paid vacation time, group health plans and a company pension. You’ll have to put different strategies in place to compensate.

Devising an income plan

How much will be coming in each month? How much will be going out? What discretionary spending could you pare back? Answering these questions will let you calculate the amount of money you’ll need from your venture to meet operating costs, as well as fund your own living expenses. Keep in mind a variable income can make getting credit – including personal mortgages – more difficult.

If your business is incorporated, you’ll have more discretion when managing income. You can draw income as salary or dividends. There are advantages to each. Salary is earned income for purposes of calculating RRSP contribution room. Dividends receive preferential tax treatment. Your advisor can further map out the pros and cons of each option and how to use both for your individual circumstance.

If you’re an older entrepreneur, there’s another wrinkle to consider when devising your income strategy: how to handle Canada Pension Plan (CPP) benefits.

Extending your career beyond the normal retirement age has implications for deciding when to begin receiving CPP. If you can afford to, holding off until after age 65 to collect can boost your monthly payout – as much as 42% if you wait to age 70. Remember, it’s considered taxable income, so plan carefully. Tacking CPP onto your business and other income could force you into a higher marginal tax rate.

Keeping your business and personal expenses separate

You may be used to your employer managing routine tax deductions from your paycheque. Once you’re working for yourself the chore of managing income tax falls to you alone. The good news is you’ll be able to deduct costs related to your business operations, from office supplies, advertising and your cell phone, to vehicle expenses. Have a home office? You could be eligible to deduct a portion of residential expenses like utilities, property taxes and mortgage interest.

Identifying those tax-saving opportunities will be simpler if you establish separate bank and credit card accounts for your personal and business transactions right out of the gate. The Canada Revenue Agency requires financial records be kept for a minimum of six years to support your filings, so it’s important to be organized.

How often must you remit? Once your net tax owing for the current year, and either of the previous two years, exceeds $3,000, you’ll have to pay income tax quarterly. And don’t forget about additional obligations like CPP premiums.

Ready to take more control of your retirement savings?

Not only should entrepreneurship prompt a review of your retirement plans, quitting your job also means you can no longer contribute to a company pension, putting more responsibility for your retirement savings in your hands.

The upside if you’re incorporated is you’ll see generally lower tax rates, plus, you can build wealth by reinvesting in your business.

At the same time, there’s danger in leaning too heavily on your business’ value to pay for your retirement. Your enterprise could hit hard times, or you might have trouble finding the right buyer when you’re looking to sell. Don’t ignore the diversification and tax-saving benefits of contributing to your RRSP and TFSA.

You’re not alone

There are plenty of moving pieces when you transition from employee to running a business of your own. The more you know about the financial implications with entrepreneurship up front, the smoother the road ahead. Devise an income plan, separate your business and personal expenses and proactively manage your retirement savings.

If you want help navigating this change, consider drawing upon the expertise of a team, including your financial advisor and business advisor. They will work with you to build a financial plan that’s comprehensive so you can accomplish your personal and professional goals.