Most small businesses are just that – small. Many entrepreneurs start operations with just themselves as principals, and do so as a way to make money while controlling their own destiny. One of the most confusing challenges that face new business owners is the question of paying themselves – there are a number of ways to set up your business, and each has it’s own advantages and disadvantages.
Types of Businesses
The Canada Revenue Agency defines a business as “a profession, calling, trade, manufacture, undertaking of any kind whatever or an adventure or concern in the nature of trade.” The business must be entered into with the intention of making a profit, and there must be evidence to this effect.
An operation with only one worker, the principal, is called a “sole proprietorship”. Sole proprietors report all of the profits of their undertakings (after deduction of costs, which can include all money spent in the operation of the business) as personal income, and are taxed accordingly.
Small businesses with more than one principal, who share in the expenses and profits, are referred to as “partnerships”. Each partner is responsible for reporting their portion of profits and expenses on their personal tax returns. The business itself doesn’t file a return with the CRA.
Businesses that are incorporated, on the other hand, are legal entities that file their own taxes. In the case of incorporation, business owners can be employees of the corporation, and collect a paycheque (subject to the same advantages and disadvantages as being employed anywhere), or can elect to receive compensation in the form of dividends. There are several factors that determine which way you should choose to be paid by a corporation in which you are a principal, most of them centering around deductions of the CPP.
Whichever way you choose to go, know that Canada’s Western Provinces are a hotbed of small business activity, and that they truly are the engine that drives the economy. For solid advice and help with accounting and bookkeeping, contact Five Star Accounting for professional service with a personal touch.