How To Start a Business in Canada: A Step-by-Step Guide to Everything You Need to Know
The Complete “How To Start a Business” Guide
Are you looking for information on how to start a business in Canada? Are you overwhelmed by the process of setting up your corporate, tax, legal and insurance obligations? We’ve got you covered. Here’s a helpful guide on everything you need know to start your own business in Canada.
1) Choose Your Business Structure
First, you must choose your business structure. Will you operate your business as a sole proprietor, a corporation, a partnership, a limited partnership or a joint venture?
If you choose to incorporate, there are many tools to optimize tax planning opportunities, including income splitting, dividend sprinkling between spouses, and the lifetime capital gains exemption.
If you will be operating your start-up business as a sole proprietorship, you will enjoy the simplicity of setting it up and maintaining it, as well as a more simplified tax structure.
A partnership, which arises when two or more persons carry on a business for profit, provides partners with greater control over how the partnership is governed and how profits are shared, as well as a more simplified structure that helps in managing the business’s accounting and business fees.
If you are in a regulated profession, such as law or accounting, a limited liability partnership might be the right business structure for you. In a Limited Liability partnership, each partner’s liability is limited to the amount they put into the business in the event the partnership fails. Should that happen, creditors cannot go after a partner’s personal assets or income.
For more information on selecting a business structure as well as a discussion of the differences, advantages and disadvantages of each, read our article on Selecting Your Business Structure – Sole Proprietorships, Corporations, Partnerships – Which is Right for You?
2) Organize your Internal Business Structure – Directors, Shareholders and Employees
If you chose to operate as a sole proprietor, you may skip this step.
If you chose to operate as a partnership or corporation, however, you must select who will occupy the positions of officer, director and shareholder(s) of the corporation. Then, these must be set out in resolutions that organize your corporation.
If you choose to operate as a partnership, you will require a partnership agreement. A partnership agreement sets out the rights and obligations of each partner as well as how the profits of the business are shared.
Who will be the shareholders of your new start up? Consider placing family members as non-voting shareholders of your corporation for income splitting purposes. However, take caution. The new Tax on Split Income Rules (TOSI) came into effect January 1, 2018, which eliminates the tax benefits of income splitting with family members who have not made a sufficient contribution to the family business.
The purpose of the new rules is to provide a more equitable playing field for employees and owners. Because income splitting with family members was not available to employees, the Federal Government decided to eliminate the distinct tax advantages that were previously available only to employers by instituting new TOSI rules.
In spite of the new rules, there are still avenues for income splitting with family members that are perfectly legal. For more information on the new TOSI rules, read our article on The New Tax on Split Income (TOSI) Income Splitting Rules for Shareholders of a Corporation.
If you have more than one shareholder, we strongly advise you obtain a Shareholders Agreement to set out the rights, obligations, and duties of each shareholder, as well as the rules for existing shareholders, buying out of shares, and policies if a shareholder becomes disabled, dies or divorces.
Finally, consider who your employees are going to be (including yourself). Then draft employment agreements for your full and part-time employees. If you are looking to hire an independent contractor to provide some services, then you may require an independent contractor’s agreement instead of an employment agreement. For the differences and benefits between these two, see our article on Employees vs. Independent Contractors – What Is the Difference, and What are the Benefits?
3) Open Business Bank Accounts
All businesses, whether you are operating through a corporation or sole proprietorship, require a separate bank account. Bring either your Articles of Incorporation or your Master Business License to the bank or financial institution when you are ready to open a business account. You may want to open an additional tax account to hold the HST you collect from your customers.
Do you require an initial loan or line of credit from a financial institution as commercial financing? Or will you be infusing the capital funds yourself? Perhaps you’re looking for an investor to invest in your business with seed funding in exchange for a share in its ownership?
If you are choosing to fund your business yourself, we strongly advise that you paper a shareholder loan. This will allow you to take out all of the funds you infused into your corporation tax free once it is profitable. The CRA will want to see evidence of this shareholder loan.
A great creditor planning tool is to register security against the corporation under the Personal Property and Security Act (PPSA), with yourself as first priority secured creditor. This way, if your business is not successful, your initial start up funds can be protected from other creditors.
5) Business Contracts
Now that your business is formed, you will likely require business contracts with suppliers, distributors, and service providers. Whether you are in the business of selling goods or services, you will likely need distributor agreements, supply agreements, service agreements, sales agreements, licensing agreements and lease agreements. You may wish to obtain these yourself or contact a lawyer for assistance.
6) Retail or Office Location (including home office)
Consider where you will be operating your business from. If you require retail or commercial office space, a commercial real estate agent can help you obtain the prime location for your business. Next, you will require a commercial lease. Most landlords will provide their standard form lease to you. We recommend that a lawyer review the terms of the lease to advise you of your rights and obligations and inform you of the likely outcome if you are unable to pay your rent.
If you wish to operate out of your home, compile all the necessary records that establish your business is a home-based business so that you can take advantage of home-office business deductions on your tax return. You are entitled to deduct the proportional cost of the proportionate space your home office occupies in your home from your business income. For more information on how you can record and obtain these deductions, speak with one of our lawyers. A tax lawyer will prepare comprehensive tax plans to achieve optimal tax savings, avoid potential tax problems, and maximize wealth.
7) Register your Start Up Business with the CRA, Ministry of Finance, WSIB
Now that your business is formed, funded and you have a location secured, next we must turn our mind to registering the business for its tax accounts.
On incorporation, the CRA automatically assigns the corporation a Business Number (BN). This will be sent to you in the mail approximately 10 days after incorporation. If you are a sole proprietor, you will need to register the business for a BN manually. You can do this by phoning the CRA directly at its business line 1-800-959-5525 or by clicking here.
Whether you are a sole proprietorship or corporation, you must also register for HST if you anticipate that your worldwide sales will exceed $30,000 in your first year. To do so, you must phone the CRA’s business line at 1-800-959-5525 to open the RT program account. Your HST number will be the same as your BN number, however it will end in RT0001.
If your business will have employees (including yourself) you must also register for an RP Payroll account. Again, you can open a payroll account by phoning the CRA business line. The payroll number will be the same as your business number; however, it will end in RP0001.
If your business’s payroll exceeds $450,000 per annum, you must also register for Employer Health Tax (EHT). Unlike a GST account, EHT is administered through the Ontario Provincial government. In order to register for EHT you must phone the Ministry of Finance toll-free at 1-866-ONT-TAXS (668-8297).
Lastly, if you have employees, you must register for WSIB. You may do so online by following this link. You will need your BN to complete the registration.
If you choose to hire a business lawyer, all of the tax and registration processes will be completed by the business law firm.
8) Insurance – Get Yourself Covered
If you’re operating a business at a commercial location, frequently interact with customers physically, or operate a “high risk” liability business (such as a coffee shop), you will want to obtain commercial liability insurance.
Commercial insurance protects your place of business and everything inside it, including all office equipment, furniture, computers and more. It can cover the loss of inventory due to fire, indemnify you against a claim from an injured patron of your business, and cover you for other business losses. If you operate a larger corporation as a director or officer, or you are a director of a non-for-profit corporation or charity, you may want to consider obtaining additional D&O insurance as well.
9) Branding, Advertising, and Trademarks
Next, you may want to consider branding and advertising your start up. Starting a business requires that you stand out in a distinctive way from your competitors. A graphic designer can develop your marks, slogan, colours and overall brand.
You will want to register these marks for trade-mark registration to secure your branding across Canada. Once this is established, you should create a website and set up social media pages on Facebook, LinkedIn, YouTube, Instagram, and even Snapchat, depending on the type of goods or services you’re selling and the your target audience. In today’s environment, you may want to consider hiring a media marketing manager to handle your Search Engine Optimization (SEO) to boost your online presence.
10) Taxes, Bookkeeping and Accounting
Business start ups require a reliable bookkeeping software system such as Quickbooks, Sage or Business Vision in order to easily maintain the books of your new business. These systems will track your accounts receivable and payable, expenses and deductions, HST paid, and the Input Tax Credit (ITCs) your business is entitled to. You may also want to hire a bookkeeper in order to conduct all of the data entry.
If your business is run through a corporation, it is advisable to hire an accountant to file the corporation’s year-end T2 Income Tax Returns. If you’re operating as a sole proprietorship, you will need to file the business’s taxes together with your own personal T1 Income Tax Return, by completing a schedule form T2125.
Finally, a tax lawyer will prepare comprehensive tax plans to achieve optimal tax savings, avoid potential tax problems, and maximize wealth.
11) System Software and Payment Processing
Starting a business requires understanding what special software you will need to assist in its operation. If you run a retail business or restaurant, you will require a POS (Point of Sale) system. If you are a service provider, such as a plumber, you will need a payment processor provider to accept payments. There are many on the market today such as Elavon, Moneris, or Square.
If you’re business is more complex, you may require industry-specific software to help you manage your business. If you are in the business of selling goods and retaining inventory, it is advisable to have advanced software that keeps track of your purchases, sales and inventory levels. If you are a professional practice, you will require industry-specific professional/medical software systems that keep track of your clients/patients and their records.
12) Licenses and Permits
Lastly, certain industries require additional licensing in order to operate within the specific practice. You must inquire whether your business requires such additional licenses. For example, if you wish to open a restaurant business, you must register with your local health unit as well as obtain a valid business licence and alcohol permit from the AGCO if you will be serving alcoholic beverages. Contact your local municipality for more information on the municipal, provincial or federal licenses you may require.
If you are in a regulated practice, such as a chiropractor, accountant, or real estate agent, etc., you will likely require licenses from your own professional regulatory body, which will allow you to operate your own business.
Permits and Licenses for Starting Your Own Business:
- Choose your business structure: sole proprietor, corporation, partnership, limited partnership, or joint venture
- Select directors, shareholders, employees. Set out resolutions and obtain a shareholders agreement and employment contracts. These are called governance and organization documents.
- Open your bank account and tax accounts and obtain loans and lines of credit.
- Secure your business with commercial contracts: distributor agreements, supply agreements, service agreements, among others.
- Register all tax accounts with government offices. If you run a corporation, you will require three tax accounts: general corporate taxes (RC), GST/HST (RT), and payroll (RP) accounts. Also open a Workplace Safety & Insurance Board (WSIB) account.
- Obtain commercial liability insurance
- Select a trade name, brand name, logo, and social media accounts. Prepare a marketing, advertising plan and budget.
Hire a business lawyer
Opening a business can be exhausting and overwhelming. We can help you fulfill all the legal requirements of starting a business. As comprehensive business lawyers, we guide you through the start-up process and manage all legal aspects of starting a business, from A to Z. If you would like more information on how to start a business and our business advisory services, click here, or contact us today.
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
© Kalfa Law, 2020
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.