The unknown unknowns of business (Part 1)

Business is full of pitfalls, and knowing what questions to ask is the first step. That is why we are going to bring you through the journey of Lewis, a persona we created to help business owners think through the unknown unknowns.

Lewis is an aspiring small business owner who wants to start a construction company. He has ten years of management experience in residential and commercial building construction. He has a working knowledge of finance and administration, but his strengths are his project management skills, industry relationships, negotiation skills and his in-depth knowledge of construction materials.

Before Lewis starts operations, he first has to decide on how to structure his business.

Should I incorporation my business?

Many aspiring small business owners like Lewis wonder when it is the right time to incorporate. If Lewis expects the profits from his business to be minimal, secondary, or only sufficient to meet his personal needs, the sole proprietorship may be the best solution. A sole proprietorship is an unincorporated business entirely owned by one person. All the income and expenses of a sole proprietorship are reported on an individual’s personal tax return. Lewis will own the business by himself and he wants to keep business assets separate from his personal ones. He also wants to protect his personal assets in case he gets sued. The administrative cost of incorporation is higher than operating a sole proprietorship, but Lewis wants to incorporate because of the added level of clarity and security it offers. Lewis decided to work with a local solicitor to complete his incorporation filings to make sure everything was in order.

How should I structure my business?

Lewis does not know why he would choose one share structure or another. At this point, he just wants to get the administration out of the way, so he can focus on operations. However, his solicitor asks him some important questions at this point, including: do you ever intend to sell your shares, and how will you pay yourself from the business?

Lewis has talked about going into business with other people and offering stock options to future managers as compensation. He is not sure how he will pay himself yet. The solicitor suggests Lewis consider issuing both preferred shares and common shares at incorporation to give him the flexibility to choose how he compensates himself and employees and how he might go into business with someone else down the road. Lewis likes the idea of having added flexibility, but he also wants to keep things simple. The solicitor explains that the initial equity structure of a business is declared when a business incorporates. The articles of incorporation list each class of shares and any restrictions or privileges they bear.

In any case, the solicitor is the best person to advise the entrepreneur to fully understand his current and future goals and needs, and to create the optimal shares structure for the company and its shareholder.

For more information on corporate share structures, check out these articles from Avalon and BMO.

Should I register for GST?

Lewis is not sure if he should register for GST. He learns that a business does not have to register for a GST/HST number until it has exceeded $30,000 in revenue over four consecutive quarters. See the Canada Revenue Agency website for more details here.

Lewis expects to generate more than $100,000 in revenue in his first year, so he will register for GST/HST. He can do this voluntarily or once he has passed $30,000 in revenue. Sometimes it is better to wait to register for GST/HST because tracking GST/HST requires administrative time. On the other hand, businesses with large purchases early on may want to claim the GST/HST tax credits on purchases before crossing the $30,000 revenue threshold. Lewis intends to buy $50,000 of equipment for his business before he earns revenue, so he will voluntarily register for GST/HST before he purchases the equipment. This way, the business will be able to claim the GST/HST tax credits on the equipment purchase.

With a little planning, Lewis now has the foundation of his business sorted, and his Company is almost ready to operate. With his business incorporated, he can find some additional funding on top of the funding he has brought to the table. In the next article, we will revisit Lewis as he applies for his first business loan.