Side Business - Proprietorship?

[A320]

Hi Everyone,

So simply put I am considering starting a small business as a strategy to supplement my income and for possible tax advantages (if they exist). Outside of my main career I posses skills in areas that I think are of demand today. So simply put, my business idea consists of computer/electronic repair + service, ie, computer repair/maintenance both on the software and hardware level, small electronics repairs, computer custom builds, and home theater setups and installations. These are things that I am simply good at and posses a high level of knowledge in.

My question pertains to what type of business I should make this based on the details provided below:

- My spouse and I both presently have career jobs
- I would start this business out of my home (initially anyway)
- I will be the sole employee with possibly my spouse doing administrative work/book keeping
- I currently make $105k/yr

Startup would involve modest costs since I already have a perfect office and equipment for doing these things (it's always been a hobby of mine).

So how should I be looking at this in terms of type of business? Should I be doing it as a 'proprietorship' vs 'corporation'? From what I understand the biggest difference between the 2 is how income from this business is taxed. As a proprietorship its simply added to my current income and taxed in it's appropriate bracket where as corporation, vaguely described, is treated as a separate entity and taxed independently but at lower 'business' brackets. Are there other things that are important to consider between the two in my case?

[MoneyGal]

There will be tax advantages in that this income will be tax-preferred for you (because deductible expenses will lower the tax rate you'd otherwise pay on the same amount of $$ earned as salary or interest, to give two examples).

However, at least in the starting years (and probably forever), you should just run this as a sole proprietorship. Incorporation offers additional tax benefits BUT they really only work when

(1) you are earning a substantial amount in the corporation (enough to offset the additional $$ associated with incorporating and keeping your corporate books etc. each year -- also this assumes you are already maxing RRSP, spouse's RRSP, TFSA and spouse's TFSA -- because if you are not, why are you trying to get additional tax benefits when you aren't using the ones you've got?) and

(2) you are not withdrawing all the funds from the corp but are able to keep substantial amounts in the corporation (because if you withdraw the cash, you're going to pay tax at your personal rates anyways).

Make no mistake, incorporation offers powerful tax-saving, tax deferral and other opportunities (estate planning, income splitting) -- but it only makes sense when we're talking $100K per more per year left in the corporation. How much can you earn as a "side" business when presumably you already have a relatively intensive job? Sole proprietorship is simple and almost certainly sufficient for your needs.

[Four Pillars]

What MoneyGal said plus:

A sole proprietor business provides some excellent income splitting opportunities with a spouse if they can do some work for the business. It's easier to do this with a corp (since the spouse doesn't have to work for the business), but it works just fine with an SP.

This is only beneficial of course, if the spouse is in lower tax bracket.

Unless you are concerned about liability issues (and you might be), starting as an SP makes the most sense. You can always convert to a corporation at any time.

[A320]

Thanks for the quick reply and good info MoneyGal.

How much can you earn as a "side" business when presumably you already have a relatively intensive job? Sole proprietorship is simple and almost certainly sufficient for your needs.

Surprisingly my career affords me a lot of spare time hence the decision to start something like this up. It's a flexible schedule with plenty of time off to spare. Yes our RRSP's + TFSA's are not currently maxed and I don't intend to leave money in the corporation as, like you guessed, I don't initially intend on this being a 6 figure business....

BUT

Say a few years go by and I am very successful at this venture, and I have a lot of demand. I may decide to lease a space hire some employee's and get into sales as well. In this instance the idea of a corporation might be more fitting. But, and correct me if I'm wrong, as I understand I can always make that switch in the future with the same business/name correct?

[A320]

What MoneyGal said plus:

A sole proprietor business provides some excellent income splitting opportunities with a spouse if they can do some work for the business. It's easier to do this with a corp (since the spouse doesn't have to work for the business), but it works just fine with an SP.

This is only beneficial of course, if the spouse is in lower tax bracket.

Unless you are concerned about liability issues (and you might be), starting as an SP makes the most sense. You can always convert to a corporation at any time.

Thanks, you answered a question in my reply to MoneyGal. My liability concerns at this point considering my initial start up ideas would be rather minute. I won't go as far as saying nil, but they would be negligible or perhaps manageable (a better word) considering I am quite setup already to start tomorrow for example.

edited to add - Yes my spouse is in a lower tax bracket.

[A320]

So my next question is how does this process begin? A simple application to the government? What will they require and what is the normal turnaround time for completing such a process?

[Spudd]

For a sole proprietorship you don't have to do anything, except declare on your next tax return that you are a sole proprietorship. This is if you choose to use your own name as the name of your business (i.e. if your name is John Doe, your business name is John Doe).

If you want to have a different name for your business you will have to register that name with the government. If you google "entrepreneur yourcity" or "small business yourcity" you should be able to find the local government small business office that can help you with the process. Example: http://www.enterprisetoronto.com/

[donald]

Check out the globe&mail(online)-Yesterday there was a article on your question-Most things are being covered here already but it's worth the read.

One big plus(money aside)organized!-When i started off i was a sole P(use to be a pain seperating everything,and having everything run through a simple chq acct and standard personal visa ect ect)INC is clean and efficient! *book keeping*.(I hated having everything personal/business tied together it was a pita!-you have to be extra organized,even if your gross sales are small,under 100k)-who ever does your books will love you if you inc!

[Four Pillars]

Check out the globe&mail(online)-Yesterday there was a article on your question-Most things are being covered here already but it's worth the read.

One big plus(money aside)organized!-When i started off i was a sole P(use to be a pain seperating everything,and having everything run through a simple chq acct and standard personal visa ect ect)INC is clean and efficient! *book keeping*.(I hated having everything personal/business tied together it was a pita!-you have to be extra organized,even if your gross sales are small,under 100k)-who ever does your books will love you if you inc!

The banking and bookkeeping are separate issues from sole prop vs corp. Under a sole prop, you can set up a separate bank account and credit card just for business use. In fact, that is what you should do.

[A320]

So I can setup separate banking for the business but bookeeping is fully intertwined with my current accounting? And yes I would like to name my business, I'm in MB.