| INTRODUCTION | | | | The Ontario Insurance Act provides that: |
| I write this piece to share my personal and | | | | "where the beneficiary of the insurance contract |
| professional experience with all of you aspiring | | | | is a spouse, child, grandchild or parent of a person |
| entrepreneurs in out there regarding issues that | | | | whose life is insured... the rights and interests of |
| you will likely have to face when starting your | | | | the insured in the insurance money and in the |
| own business. Please note that some of the legal | | | | contract are exempt from execution or seizure..." |
| topics in this piece apply to someone starting and | | | | Therefore, insurance products held in RRSPs will |
| operating a business in Ontario, Canada. | | | | be exempt from seizure by your personal |
| DO YOU HAVE WHAT IT TAKES? | | | | creditors. |
| Experience and education | | | | A very important point: you should make these |
| You need the technical education and experience | | | | arrangements before you get into personal |
| in your area of interest to provide a great service | | | | financial trouble, not after you've become |
| or product, whether you're an accountant, a | | | | exposed to personal debts. If you were to say, |
| furniture salesman or a web-designer. But if you | | | | transfer your home to your spouse when the |
| have only this, it only qualifies you to be great | | | | bank is trying to collect on the personal guarantee |
| employee. It doesn't mean you are able to run a | | | | you gave to them, these arrangements will not |
| business. | | | | work. There are laws that can set aside transfers |
| To successfully run a small business, you need to | | | | of assets where the intent is to hide your assets |
| be a "jack of all trades" with a working knowledge | | | | from your creditors as they're trying to collect |
| in the areas of sales & marketing, accounting | | | | their debts. |
| & finance, business law, and human | | | | Therefore, make arrangements to protect |
| resources management. | | | | yourself personally with these tips before you |
| No one expects you to be an expert in these | | | | open the doors to your business, not after you've |
| areas to be a successful entrepreneur, but you | | | | closed them! |
| should know enough to identify potential problems | | | | SETTING UP YOUR BUSINESS |
| or issues so you can hire an expert to deal with | | | | Finding a location |
| them quickly before problems get worse. If you | | | | Many entrepreneurs start their businesses from |
| cannot even identify a problem, then you're | | | | home. If that suits you, then read no further. |
| setting yourself up for some major trouble. | | | | However, if you require actual business premises, |
| If you've considered starting up a business, you | | | | you should consider the following factors: |
| ideally should first find a job with a successful | | | | - How will your customers get to you? Is it |
| employer in the industry that interests you and | | | | conveniently located by public transportation? Is |
| learn all aspects of how the business is run. You | | | | there free parking? |
| should also enroll in some introductory courses in | | | | - How much space will you need to operate? |
| accounting, finance, business law and marketing at | | | | - What is the reputation of the landlord? Do they |
| a local college or university. | | | | regularly maintain the upkeep of the building |
| Personality traits | | | | premises? You don't want to turn off potential |
| From our experience, most successful | | | | customers because they think your place looks |
| entrepreneurs have the following personality traits: | | | | like a slum. |
| 1. They are highly organized | | | | - How are the views and lighting? You don't want |
| 2. They love their work - they are truly | | | | rent a place with a view of the wall from the |
| passionate about what they do and that gives | | | | next building. You want to create a nice work |
| them an edge over their competition. This | | | | environment for your staff so they're happy and |
| translates into a strong work ethic, and the best | | | | productive. |
| entrepreneurs are considered "workaholics". | | | | - Will you be able to get the landlord to waive a |
| 3. They have a broad range of interests and | | | | personal guarantee for the lease? |
| talents. In the context of running a business, they | | | | After considering these factors, review the price |
| are good at selling, financial management and | | | | per square foot and negotiate a mutually |
| working with people. This goes back to being a | | | | agreeable arrangement with landlord. For example, |
| "jack-of-all trades" in order to succeed in business. | | | | you may be able to get at few months free rent |
| 4. They can tolerate risk but carefully assess | | | | as part of the final lease agreement. |
| risks before making any major decisions. | | | | Interviewing and hiring staff |
| To be more specific, there are people who are | | | | Getting people to submit resumes is always easy. |
| highly intelligent and educated, but require the | | | | Hiring the right person out of that stack of |
| emotional security blanket of having a job with a | | | | resumes is not. |
| steady paycheque. At the other end of the scale | | | | It's been said that the first thirty seconds of a |
| are business people who will make decisions | | | | job interview will ultimately determine if the |
| recklessly without first getting facts, analyzing | | | | candidate gets the job or not. You either like |
| them and then weighing the risks. Neither of | | | | someone or you don't. However, even though |
| these types can be successful entrepreneurs in | | | | you might "click" with the candidate, it would be a |
| the long run. | | | | mistake to hire someone without performing a |
| PREPARE A BUSINESS PLAN | | | | thorough background check. |
| Why? Because you need to know who you're | | | | It is important that you verify a candidate's |
| selling to - what's the point of being in business if | | | | employment history and references as well as |
| you can't sell your product or service? | | | | their educational background. Even if their previous |
| You also need to know how much it's going to | | | | job experience and educational background have |
| cost to set up and run your business. After all, if | | | | no bearing whatsoever on the position that |
| you spend more than what you sell, you'll be | | | | they're applying for, it is crucial that you confirm |
| losing money. Why be in business if you're losing | | | | that they're being truthful to you. If not, then this |
| money all the time? | | | | is a significant character flaw - if they can lie to |
| Finally, unless you already have a lot of money in | | | | you so easily, they can just as easily steal from |
| the bank, you need to figure out how you're | | | | you. |
| going to finance the start up costs of your | | | | You should also consider performing a credit |
| business. | | | | history search and criminal background check. It is |
| Who are you selling to (define your market)? | | | | not unusual to meet job applicants who filed |
| If you took our advice previously and worked for | | | | bankruptcy or who've been convicted of a |
| a company specializing in your industry of interest, | | | | criminal offence. Everyone has made mistakes in |
| you should have an idea of who you can sell to | | | | their life and you should not necessarily hold this |
| and at what price. | | | | against the applicant. The honest ones will usually |
| If you didn't, and have no idea whatsoever, then | | | | tell you up front about their past before you |
| stop right here - you shouldn't be starting a | | | | even perform such a background check. That |
| business at all. | | | | being said, it is a factor for you to consider in |
| Will I make any money (preparing a cash-flow | | | | making your final hiring decision. |
| projection)? | | | | Advertising your business |
| The most common costs you'll incur can be | | | | Whether you advertise using "traditional" methods |
| separated into two categories: | | | | like print media and television, or "modern" |
| Setup costs | | | | methods such as internet advertising depends on |
| - Legal fees if you're incorporating your business | | | | your audience. |
| - First and last months rent if you're operating | | | | If for example, you are targeting an older |
| from rented premises | | | | demographic (say over 55 years), then traditional |
| - Costs of setting up an IT network, phone and | | | | advertising may be the way to go. On average, |
| fax system | | | | this demographic tends to spend more time |
| - Office furniture | | | | reading newspapers and watching television than |
| Monthly operating costs | | | | younger people. |
| - Rent | | | | On the other hand, if you are targeting a younger |
| - Wages | | | | demographic, then internet advertising may be |
| - Inventory purchases if you're selling goods | | | | the way to go. It is not surprising that traditional |
| - Professional fees (accounting, legal) | | | | print media like newspaper companies and |
| - Leasing costs for business equipment | | | | television stations are in serious financial trouble. |
| - Advertising | | | | Their audience (and advertising revenue) is |
| Once you're able to estimate what you can sell | | | | shrinking because more people are getting their |
| and your cost of doing business, you (or you and | | | | news and entertainment through the internet. |
| your accountant) are in a position to put together | | | | Advertising in print media like the Yellow Pages or |
| a cash-flow projection. | | | | in newspapers can be very expensive (especially |
| The purpose of putting together a cash-flow | | | | in a market like Toronto). From our personal |
| projection is to determine if it makes sense to go | | | | experience, we've found that advertising on the |
| into business in the first place. | | | | internet is the most effective and cost efficient |
| Therefore, get accurate information about what | | | | way to reach out to our audience. |
| how much you can sell and how much it costs to | | | | There are many freelancers who can help you |
| set up and operate. If you don't do this before | | | | design and place a website on the internet. |
| proceeding with actually going ahead with the | | | | However, you also want people to find your |
| business, it could lead to disaster. | | | | website when a prospective customer types in a |
| Getting financing | | | | search term into a search engine like Google or |
| You've now estimated how much it will cost to | | | | Yahoo! For this, you'd need to hire a Search |
| set up the business. It's now time to get the | | | | Engine Optimization consultant (SEO). |
| start-up capital. You have a number of options: | | | | An SEO will essentially make your website more |
| Your own money | | | | "searchable" by search engines. This is usually |
| - Many people get the start up money they need | | | | done by, among other things, integrating certain |
| by mortgaging or re-mortgaging their homes, or | | | | keywords into the text of your site, building "links" |
| selling property or possessions | | | | to your site from other websites, creating "cost |
| - Banks and other lenders rightfully expect you to | | | | per click" web advertising campaigns with Google |
| make a personal financial commitment - this is | | | | Adwords or Yahoo Search Marketing, and listing |
| called putting "skin in the game". | | | | your business in Google's Local Business directory |
| Family and friends | | | | TAXES: WHAT YOU NEED TO KNOW |
| - If you're fortunate enough to have them believe | | | | GST |
| in your ability to succeed, family and friends may | | | | - If you provide a good or service in Canada and |
| be willing to provide a business start up loan | | | | your annual revenue will exceed $30,000, you're |
| - Never, ever approach friends and family unless | | | | required to register your business and collect GST |
| you have a detailed business plan that will | | | | - If you're operating as a sole proprietor or you |
| demonstrate why your business will succeed. | | | | are the director of a corporation, you'll be |
| - If you cannot factually demonstrate how your | | | | personally liable if you don't collect and/or remit. |
| business will succeed, and how you'll repay them, | | | | PST |
| you are just throwing their money away | | | | - If you sell goods to "end-user" consumers (as |
| - We've seen this scenario play out, which results | | | | opposed to reselling to another business), you're |
| in broken friendships and strained family | | | | required to collect and remit provincial sales tax |
| relationships | | | | - If you're operating as a sole proprietor or you |
| Canada Small Business Loan Program | | | | are the director of a corporation, you'll be |
| - Administered by Industry Canada. Although you | | | | personally liable if you don't collect and/or remit. |
| borrow the money from a bank, the Canadian | | | | Payroll tax |
| government basically guarantees that the bank will | | | | - You are required to deduct income tax, CPP and |
| be repaid in the event your business fails | | | | EI withholdings from your employees' wages and |
| - Provides up to $500,000 of financing | | | | remit these withholdings to the Canada Revenue |
| - You must be carrying on business for profit with | | | | Agency every pay period |
| gross annual revenues of $5 million or less | | | | - You are also required to pay CPP and EI |
| - Loan proceeds can only be used to purchase | | | | premiums, calculated as a percentage of your |
| business equipment, leasehold improvements to | | | | employees' wages |
| leased premises, or to purchase land for business | | | | - If you're operating as a sole proprietor or you |
| operations | | | | are the director of a corporation, you'll be |
| - You cannot use the proceeds to finance working | | | | personally liable for failure to remit withholdings |
| capital, like inventory or accounts receivable | | | | and/or premiums to the Canada Revenue Agency |
| - You apply by completing a loan application at | | | | Corporate Income Tax |
| your bank. If the bank decides to grant you a | | | | - The federal corporate tax rate is 38 percent of |
| loan, they register it with Industry Canada | | | | net income |
| - If you give a personal guarantee, you're only | | | | - If you're operating as a Canadian Controlled |
| personally liable for 25 percent of the initial | | | | Private Corporation (essentially a company |
| amount borrowed. This is a big advantage over | | | | incorporated in Canada whose shares are |
| conventional loans, which usually require you to | | | | privately owned by a Canadian resident), this rate |
| personally guarantee 100 percent of the loan | | | | is reduced to 28 percent |
| borrowed by your business | | | | - For the first $500,000 of net income earned by |
| Canadian Youth Business Foundation | | | | a CCPC, there is a further reduction to 11 percent |
| - This is a national charity that provides young | | | | - In Ontario, the provincial corporate tax rate for |
| entrepreneurs (18 to 34 years) of up to $15,000 | | | | a CCPC is 14 percent of net income. The first |
| in start up capital | | | | $500,000 of net income earned is taxed at 5.5 |
| - There is a mandatory 2-year mentoring | | | | percent |
| program where you are matched up with an | | | | - The combined federal and provincial corporate |
| experienced businessperson to allow knowledge | | | | tax rate in Ontario on net income under $500,000 |
| sharing and a higher business success rate | | | | is 16.5 percent |
| Business Development Bank of Canada (BDC) | | | | - There is no director liability for non-payment of |
| - BDC is a Crown corporation owned by the | | | | corporate income tax. |
| Government of Canada | | | | EMPLOYER OBLIGATIONS: WHAT YOU NEED TO |
| - Its goal is to support small businesses in Canada, | | | | KNOW |
| by providing consulting and financing services | | | | WSIB |
| - Its "Co-Vision" loan program can provide up to | | | | - Employers contribute to WSIB, which is a |
| $100,000 in financing, which can be repaid over 6 | | | | provincial insurance fund. |
| years. If needed, borrowers can postpone principal | | | | - The amount of premium payable is based on |
| payments for 12 months | | | | the size of your payroll and the accident |
| - The program targets businesses in | | | | experience in your industry. For example, a mining |
| manufacturing, distribution, services and tourism | | | | company will pay a higher premium for its |
| - Loan proceeds can be used to finance working | | | | employees than an accounting firm |
| capital, fixed assets, marketing and start-up costs | | | | - Injured workers are compensated by the WSIB |
| as will as purchasing an existing business or a | | | | on a "no fault" basis; that is, compensation is paid |
| franchise | | | | no matter who is at fault, the employer, the |
| - Must be able to demonstrate realistic market | | | | employee or someone else. In return for |
| and sales potential | | | | automatic compensation, the employer is shielded |
| - Must also be able to demonstrate relevant | | | | from any other liability. An employee cannot sue |
| experience and knowledge about your industry | | | | your company for negligence if that negligence |
| - Must be able to give personal and financial | | | | causes a work-related injury |
| references | | | | - The main focus of the WSIB system is to get |
| WHAT IS THE BEST LEGAL STRUCTURE? | | | | the injured employee back to work as soon as |
| Most people start their businesses on a small scale | | | | possible. If injured employee cannot perform his |
| and operate initially as sole proprietorships. You | | | | or her regular work, your company may offer |
| only need to register your business name through | | | | suitable modified work that the worker can |
| Service Ontario, either at one of their kiosks or | | | | perform without aggravating the injury. If the |
| online. As of this writing, the registration fee is | | | | work is, in fact, suitable the injured worker must |
| $60.00. | | | | accept it. |
| However, if you expect your business to regularly | | | | - There is no director liability for unpaid WSIB |
| incur debt as part of its operations (e.g., purchase | | | | premiums of a corporation |
| of inventory on credit terms, leasing of | | | | Wages and vacation pay |
| equipment) or your industry is known to be highly | | | | In Ontario, your obligations to your employees are |
| litigious (i.e., there may be a good chance you can | | | | governed by the Ontario Employment Standards |
| be sued someday), then we advise you to | | | | Act. You are required to give your employees: |
| incorporate from the outset. | | | | - Two weeks vacation |
| So what is a corporation anyway? A corporation | | | | - Termination pay, which increases with the length |
| is a legal person, just like you. It can purchase | | | | of employment |
| assets, incur debt, file lawsuits or be sued just like | | | | - Severance pay where: (1) an employee has |
| a "natural" person. It has many of the same rights | | | | worked at your company for at least 5 years |
| as a natural person. Corporations exist as virtual | | | | and; (2) your annual payroll is $2.5 million or more. |
| or fictitious persons, granting limited protection to | | | | The amount payable increases with the length of |
| the actual people involved in the business of the | | | | employment |
| corporation. This limited liability is the major | | | | - If you're operating as a corporation, a director |
| advantage of incorporating your business. | | | | of the corporation is personally liable for up to 6 |
| So why is the protection "limited" and not | | | | months' unpaid wages and vacation pay |
| "absolute"? Because a director of a corporation | | | | FINANCIAL CONTROLS: WHAT YOU NEED TO |
| (who is usually also the shareholder who owns the | | | | KNOW |
| company) has personal exposure to certain | | | | Segregation of duties |
| statutory business debts, such as: | | | | The basic concept is this: the person responsible |
| - GST collected by your business but not | | | | for the recording of assets coming in and going |
| remitted to Canada Revenue Agency | | | | out of your company should not be the same |
| - Payroll taxes deducted from your employees' | | | | person who handles those assets. For example: |
| wages, but not remitted to Canada Revenue | | | | - The person who approves invoices for payment |
| Agency | | | | should not be responsible for writing and signing |
| - Employer premiums for EI and CPP | | | | cheques. He has an opportunity to defraud the |
| - Up to 6 months unpaid wages and vacation pay | | | | business by making payments to fictitious |
| of your employees | | | | companies |
| - Retail Sales Tax collected by your business but | | | | - If the purchaser orders and receives the goods, |
| not remitted to the Ontario Ministry of Finance | | | | he can place an order for more than is needed |
| Also, if you gave any personal guarantees to any | | | | and keep the rest. |
| of your business creditors, for example, the bank | | | | - If the person who writes the checks handles |
| for your loan or your landlord when you signed | | | | the bank reconciliation, no one will know if he |
| the lease agreement, incorporating your business | | | | writes checks to himself or relatives. |
| will not protect you personally if you fall behind in | | | | When starting out your business, this usually won't |
| these obligations. Therefore, to the extent | | | | be an issue as you will be the only employee |
| possible, negotiate your way out of giving any | | | | along with perhaps a handful of staff. However, |
| personal guarantees for your business. | | | | as your company grows and you hire more staff, |
| The easiest way to incorporate is to see a | | | | internal control through segregation of duties |
| lawyer, who will prepare, have you sign and | | | | becomes extremely important. |
| register the necessary documents to incorporate | | | | Periodic Financial Statements |
| your business. Unfortunately, between legal fees | | | | This would include a balance sheet, profit & |
| and government registration fees, it costs quite a | | | | loss statement and cash-flow statement. It is |
| bit more to incorporate compared with registering | | | | crucial that you regularly monitor your businesses' |
| a sole proprietorship. | | | | financial performance on a periodic basis. This is |
| PREPARING PLAN B: WHAT IF IT FAILS? | | | | particularly important during the first few years of |
| A frequent cause of personal financial difficulties is | | | | business - you need to know if you are making |
| the failure of a business and the attendant | | | | money or losing money, and when to call it quits if |
| business-related liabilities personally owed by the | | | | you're operating at a loss. |
| company owner. Here are some simple | | | | Ideally, you should prepare financial statements on |
| suggestions to preemptively protect your | | | | a monthly basis, so you can make the necessary |
| personal assets in the event the business fails: | | | | adjustments to your business operations if you |
| 1. As we suggested in the previous section, | | | | determine that you're spending too much in |
| consider incorporating the business. Incorporation | | | | certain areas or whether your sales targets are |
| will provide you with a level of creditor protection. | | | | being met. If you wait until the end of your |
| So long as you've been current on paying your | | | | business year to prepare the financials, you may |
| statutory liabilities (listed in the previous section) | | | | not realize the problem areas in your business |
| and those creditors for which you gave a | | | | operations until it's too late. |
| personal guarantee, you'll be personally protected | | | | CONCLUSION |
| from your other business debts. | | | | As a professional accountant in Toronto, Canada, |
| 2. Consider transferring personal assets to a | | | | the country's largest city and financial and |
| spouse's name or a family trust. After the | | | | business capital, I have come across many poor |
| transfer, these assets no longer owned by you | | | | souls who've lost everything after having failed in |
| and are therefore not subject to claims of your | | | | business. This article was written to assist the |
| personal creditors. | | | | reader in avoiding the pitfalls that hinder many |
| 3. If you are putting away money for retirement, | | | | entrepreneurs. However, it is an overview rather |
| consider investing in RRSPs that are exempt from | | | | than a complete analysis of issues facing a |
| the claims of your personal creditors; for | | | | prospective Canadian entrepreneur. Before |
| example, segregated funds. The distinction | | | | applying any of these suggestions, consult your |
| between segregated funds and mutual funds is | | | | professional advisor. |
| that segregated funds are insurance contracts. | | | | |