# Side Business - Proprietorship?



## A320 (Sep 15, 2010)

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?


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## MoneyGal (Apr 24, 2009)

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.


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## Four Pillars (Apr 5, 2009)

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.


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## A320 (Sep 15, 2010)

Thanks for the quick reply and good info MoneyGal.



MoneyGal said:


> 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?


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## A320 (Sep 15, 2010)

Four Pillars said:


> 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.
> 
> ...


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.


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## A320 (Sep 15, 2010)

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?


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## Spudd (Oct 11, 2011)

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/


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## donald (Apr 18, 2011)

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!


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## Four Pillars (Apr 5, 2009)

donald said:


> 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.


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## A320 (Sep 15, 2010)

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.


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## SlowandSteady60 (Feb 19, 2012)

Read your post with interest. Going to go out on a limb by your description and guess that you are a teacher/professor of a College. Anyways, our interests are similar and I just started a new business and went right out and incorporated it. It is very cheap to do, you can do it online by yourself and be ready to go within a couple of days. If you choose a sole proprietorship and you want to name your business, you have to apply for a name search. I'm almost certain this can be done online as well. I believe you choose three names and go hunting. They tell you which one you can use. I believe incorporating is better, because of taxation and it isolates business from personal as far as liability. Don't get me wrong, if someone wants to sue you, they will come after you no matter what. You will also want to apply for an HST number if you think you will do over $30,000 for the year. With your full time job as a backdrop, my advice would be to keep it small. More work = more headaches. Not my first time at the rodeo. I have done this before and don't quote me on anything. Like everything else, do the homework. Sounds like you have a good thing going on. Good Luck


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## sharbit (Apr 26, 2012)

With a propriotorship you can keep them in the same account or seperate them. In regards to book keeping it would be easier if they are seperate. If you do seperate your accounts try and just get a personal account - the fees on a business account are quite excessive IMO. I'm with CIBC and my banking charges expense for my corp last year was 167$. Don't incorporate until you have to or your at the top tax bracket unless you know how to do the book keeping and filing on your own.

If you have foot traffic to your business you may have to get a business licence from your municipal government. There's usally a minor and a major business licence. You'll have to read up on it. It may not even be required.

Other then that you're all set. The only other detail - if you have more then 30,000 in revenue in one 4 month period you need to begin to remit GST. At that point you may want to get an accountant.

Good luck!


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## A320 (Sep 15, 2010)

Nope not an educator 'SlowandSteady60'! Good guess though (or is it, I thought profs never stopped!)

'Sharbit' you state not to incorporate until at the top tax bracket. Currently I am practically taxed to the fullest extent (1 bracket left federally from 26% to 29% for income above $132k), so as a proprietorship, as I understand, the additional income is simply added and filed under my current income tax therefore I will theoretically be 'taxed out, but on the other hand, my spouse is not in the top bracket so perhaps she can claim this income solely?


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## sharbit (Apr 26, 2012)

I was simply referring to the extra cost of incorporation. I do all the filing myself and its about 400$/yr + time. If you have to get an accountant they will charge you ~1000-1500 (I'm just guessing). There’s also significant cost for disposal or winding down of a corporation. This may be in excess of any tax savings and therefore depends how badly you wanted the tax deferral. Originally I was planning to go back to school for an MBA so the tax deferral made sense. Now I'm not so sure and have to think what to do with the money. It really depends how much you think you'll make.

Also, since I can read minds over the internet: keep in mind investing such as stock market activity is taxed harshly in small corporations to deter this type of tax avoidance. Most extra tax is refunded however its not a simple situation where any benifit is clear.

As for income splitting, I don't really know enough to give you good info on that. I have lots of knowledge in the area I just don't know if its correct because I've never applied it. I'm sure there's lots of other smarty pants people on here that can answer that though.


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## A320 (Sep 15, 2010)

Hi 'sharbit' were you inferring that I'd make investments in stocks via the business? I wasn't planning on this but from what you're saying, people attempt this to save on taxes but in actuality are taxed more on capital gains if they are done through a business, is that correct?


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## MoneyGal (Apr 24, 2009)

Complex area but in a nutshell, if you leave funds in the corporation and invest them (because you want a return beyond what's available in a HISA), you will lose any tax advantage of having the funds in a corporation. 

I usually estimate the costs to set up a corporation at $4000 in the first year and $1000 in every year thereafter.


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## A320 (Sep 15, 2010)

Made some calls and got more clarification regarding investing within a corporation. Thanks so far everyone. So I'm going to start it as a proprietorship but I want to be able to claim any earnings under my spouse's income tax vs my own. Any formal process regarding having her as an owner/employee and claiming all earnings?


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## marina628 (Dec 14, 2010)

We pay $1600 a year for the accountant to do the corporate taxes and then we have her once every quarter to go over the books with us ,figuring out different stuff for us both personally and for the corporation.We have 12-15 employees and contractors and also have foreign workers so we pay her hourly to do that sort of stuff.Probably $3000 a year is our estimated cost for accounting.


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## Four Pillars (Apr 5, 2009)

A320 said:


> Made some calls and got more clarification regarding investing within a corporation. Thanks so far everyone. So I'm going to start it as a proprietorship but I want to be able to claim any earnings under my spouse's income tax vs my own. Any formal process regarding having her as an owner/employee and claiming all earnings?


The simplest way is to pay her as a contractor.


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## MoneyGal (Apr 24, 2009)

A320 said:


> Made some calls and got more clarification regarding investing within a corporation. Thanks so far everyone. So I'm going to start it as a proprietorship but I want to be able to claim any earnings under my spouse's income tax vs my own. Any formal process regarding having her as an owner/employee and claiming all earnings?


Seriously, don't do this. It isn't legal; it is tax evasion and you are likely to be caught. You can pay your wife for work she undertakes for the business so long as (1) she actually does it and (2) the amount you pay is "reasonable." 

So if your goal is to have your earnings from the business accrue to your wife, the easiest (and legal) way to do this is to incorporate and pay her dividends. It isn't that simple, though; there are ownership considerations and there will be tax implications beyond the the transfer of $$ from the corp to your spouse. 

You should, at this point, schedule a meeting with your professional advisors: lawyer and/or accountant to work through the implications. (Accountant first.)

Editing to make this clearer: you can pay your wife a "reasonable" amount for documented work she carries out for the business. You cannot pay her for work she does not carry out and you cannot claim work you perform as really "her" work. You will only ever be able to transfer a certain amount (not 100%) of the income from this business over to your spouse whether you incorporate or remain a SP. 

If your ultimate goal is to reduce the tax you would otherwise pay on these earnings, there are other ways to do it than what you are proposing and any competent CA can outline them for you.


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## sharbit (Apr 26, 2012)

We're playing the two handed laywer 

This is the unfortunate thing with the tax code. It benifits people with money or knowledge but acts as a barrier for the unfamiliar to start a business.


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## donald (Apr 18, 2011)

Four pillars-Why would i go back?I've been inc since 06.I have gross sales between 350k-500k(maybe some business owners think that is penuts,i don't Know?Do you?(4 man operation)

Inc was one of the best things i did!I have one of the best roofing companies in winnipeg manitoba-I'm growing and will get in the millions for gross sale(prob next 3 yrs) PM if you want info i will tell you about my company.


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## A320 (Sep 15, 2010)

sharbit said:


> We're playing the two handed laywer
> 
> This is the unfortunate thing with the tax code. It benifits people with money or knowledge but acts as a barrier for the unfamiliar to start a business.


Very true. And for clarification, I am not seeking for a way to evade or fraud my way out of taxes, simply put, my spouse and I want to start a small home "side" business to modestly supplement our current combined income's and reap any tax benefits we can along the way.


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## MoneyGal (Apr 24, 2009)

OK, but what you said is, "I want to start a business [now you are saying "my spouse and I want to start a business"] and I want all the earnings [presumably including earnings on work you perform] to be reported under her name."


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## A320 (Sep 15, 2010)

I'm pretty sure my stance was inquisitive when talking about whether or not my spouse could report the earnings and only after it was suggested by others in this thread. I mean I started this thread trying to seek information in a subject that is obviously new to me. And you must not be married MoneyGal because when a man says "I want to" what that really means is "only if my wife approves and thinks this is a good idea too"! We're a couple so naturally this involves both of us. Please don't mince words and make suggestive, erroneous inferences.


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