Starting a Small Business (No. 265)
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There’s a lot to be said for starting your own small business. You can be your own boss, and if it goes well you'll have the satisfaction of having created something of value. But statistics show that small businesses have a high failure rate too. Often it's because of inadequate or unrealistic business planning. This script discusses some of the legal aspects to starting a business that you should consider.
- 1 Generally speaking, there are three ways to start a business
- 2 Buying an existing business has many obvious advantages
- 3 Acquiring a franchise is a common way to start a business
- 4 What about starting your business from scratch?
- 5 A sole proprietorship is the simplest form a business can take
- 6 What about a partnership?
- 7 A company is a popular way to start a business from scratch
- 8 You’ll need a business licence and name approval
- 9 Other government regulations and requirements may apply too
- 10 Where can you get help or find more information?
Generally speaking, there are three ways to start a business
- You could buy an existing business.
- You could acquire a franchise.
- You could start a business yourself from scratch.
Buying an existing business has many obvious advantages
These include loyal customers, trained employees, reliable suppliers, and fully equipped premises. Sometimes the seller will even stay on for a while until you learn your way around. But you’ll pay for this convenience—buying an existing business usually involves the greatest initial capital outlay. And you need to take care that you really are getting what you're paying for and won’t be stuck with any hidden liabilities. You might even want to prevent the seller from turning around and setting up shop in direct competition with you. These are all things that should be included in a written purchase agreement.
If you're considering buying an existing business, consult your lawyer early before making an offer to ensure your investment is protected. Note that there’s a distinction between buying the shares of the business as opposed to the assets. Buying the assets usually means taking on less risk. Your lawyer can explain this to you.
Acquiring a franchise is a common way to start a business
A franchise is a system for distributing and marketing a product or service, such as the right to sell a certain brand of fast-food hamburgers or a dollar store. Sometimes financing and training are supplied, so a franchise can be a good turnkey operation. Usually you're obliged to buy goods or services from the “franchisor” (the person or company who grants you the franchise) on an on-going basis, as well as pay for your initial investment, and there are nearly always restrictions on how you run the franchise. Sometimes these are so strict that you're the boss in name only. And there's a danger that you may end up paying substantial royalties or supply premiums. Also, franchisors often require a deposit to apply. Don’t give the deposit until you’re sure you qualify for the franchise.
If you're considering a franchise, check out its reputation in the business community as best you can, and have your lawyer examine the agreement before you sign. Depending on the franchise, many terms may be negotiable, so you may not have to accept what the franchisor first offers you.
What about starting your business from scratch?
There are pros and cons to starting your business from scratch. On the plus side, it’s usually less expensive than, say, buying a franchise or existing business. The cons, on the other hand, include having no support from a vendor or franchisor, starting with no customers, and losing money while starting up as you attract customers from a zero base.
If you start from scratch, you'll have to decide what form of business to use:
- Will it be alone in a sole proprietorship?
- Will you work with others in a partnership?
- Will you incorporate a company?
There are advantages and disadvantages to each of these, and your particular circumstances will determine which is best for you.
A sole proprietorship is the simplest form a business can take
There are several advantages to starting a business as a sole proprietorship:
- It’s the least expensive form of business to set up.
- You don't have to share the profits with anyone.
- Decision-making is quick and management is relatively easy there's no one to consult but yourself.
- You can do business under a business name even if you’re a sole proprietorship. For example, as John Smith, you can do business under the name of “The Sandwich King.” (But make sure you’ve registered the name before using it.)
But there are disadvantages too:
- If you should die, the sole proprietorship comes to an end.
- You have unlimited personal liability for the debts of the business, so if the business fails, you may risk losing your personal assets, such as your house or car.
With respect to income taxes, if the business makes money, it will be taxed as your personal income—you don't get the benefit of the small business tax rate. On the other hand, as many businesses don’t make money in the first few years, you’ll have tax deductions you can use. A good rule of thumb is to save a percentage equal to your potential taxes so that you don’t have a large tax bill at the end of the year.
What about a partnership?
A partnership has the advantage of combining the talent and resources of two or more people in a way that can be tailored to suit the needs of your business. A partnership agreement setting out each partner's rights and responsibilities is very important, and you should take the time to develop one before you start the partnership.
But there are drawbacks to a partnership. As a partner, you’ll be personally responsible for all the debts of the partnership and, generally speaking, you'll be bound by the acts of your partners, even if you don't agree with them.
For tax purposes, each partner will treat his or her share of the partnership's profits as personal income.
There is a type of partnership, called a “limited liability partnership,” that limits the liability you may have for your partner’s actions—talk to your lawyer about this.
For more information on partnerships, refer to Script 266 on “Forming a Partnership”.
A company is a popular way to start a business from scratch
It is a separate legal entity from its owners. A company is liable for its own debts, owns its own property and can sue or be sued. Its owners, called shareholders, enjoy limited liability. This means that their personal assets are generally not at risk and they are not personally liable for the company’s debts. The loss that they’re exposed to is their initial investment.
But sometimes this isn't as good as it sounds. Lenders often insist that the shareholders of small companies personally guarantee the company's debts, so that the lender is sure of getting repaid even if the company can't pay. Also there are some circumstances in which a shareholder may be held personally liable for the company's obligations.
Other points to note:
- You must use the words “incorporation,” “limited” or “corporation” (or Inc., Ltd., or Corp.) with the company name.
- You can incorporate federally or provincially. (If you’re going to do most or all of your business in BC, you should register in BC, as it’s much easier in the long run.)
- You should have a shareholder’s agreement. Have your lawyer assist you with preparing one.
As for tax, a company files its own return and pays its own tax. Shareholders pay tax on what they receive in dividends, bonuses or salary from the company. Depending on your personal income level, you might be able to save tax dollars by incorporating.
For more information on incorporating a company, refer to Script 267 on “Forming a Private Company”.
You’ll need a business licence and name approval
Whatever form of business you choose a sole proprietorship, partnership or company—you’ll need a business license and name approval. You get a business licence from your town or city hall, and the cost will vary depending on the type of business and whether it's operated from commercial or residential premises. You can get the name approval from the provincial government. Many banks won’t give you financing until you have a business licence and name approval.
Other government regulations and requirements may apply too
- Licences and registrations: Some businesses cannot be carried on at all unless you’re legally qualified to do so. For example, you can't start up a real estate agency unless you’re licensed. So make sure you have any special licenses or registrations that are required for your particular business.
- Employee rules: If you have employees, you’ll have to set up accounts with the Canada Customs and Revenue Agency (or CCRA) for withholding taxes, Canada Pension Plan (or CPP) deductions, and Employment Insurance (or EI) premiums. You may also have to establish accounts for the Good and Services Tax and Provincial Sales Tax remittances and Workers Compensation Board contributions.
- Zoning and bylaws: Do you know where you’ll be located? Some types of business can't be operated in certain areas because of zoning by-laws. If you're planning to run your business from home, be sure to check the by-laws at your local city hall, and if you live in a condominium, look at the strata corporation by-laws as well. As for commercial premises, just because someone is willing to sell or rent space to you doesn't mean that the property meets all zoning requirements for the business you have in mind. Check this out yourself at your town or city hall
- Building permits: If you're going to renovate the premises, you'll need a building permit. If you're renting commercial space you'll probably have to pay at least a share of all municipal assessments on the premises, including a business tax over and above your rent. Make sure you get your lawyer to review your lease agreements before signing them.
- Other regulations: Depending on the business you're in, your product or service may be subject to certain regulations. Some products have labeling requirements and door-to-door sales are subject to regulation, just to give two examples.
Where can you get help or find more information?
- Small Business BC has excellent information on starting a business and free guides. Call 604.775.5525 in Vancouver or 1.800.667.2272 elsewhere in the province, or visit www.smallbusinessbc.ca.
- The federal Industry Canada site www.ic.gc.ca has information and free guides on starting a business, incorporating a federal company, patents, taxes, and so on.
- Visit the provincial OneStop Business Registry website at www.bcbusinessregistry.ca, which allows you to apply for various business licences and registrations at one time. It also refers you to “kiosks” where you can get a real person to help you. The OneStop Help Desk number is 250.370.0332 in Victoria or 1.877.822.6727 elsewhere in the province.
- For more information on incorporating a BC company, visit the Corporate Registry’s website at www.bcregistryservices.gov.bc.ca/bcreg/corppg/.
- Your lawyer, accountant or bank manager can advise you on certain matters. Many school boards and colleges offer seminars on starting a business. Your public library has a wealth of information including trade directories and information on sources of government assistance.
- Finally, don't be afraid to talk to other people who have started their own business.
[updated July 2014]
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