What You Should Know After You Have Incorporated
Deciding whether to incorporate can be challenging for many small business owners. There is a lot of conflicting information and it can be hard to determine, in the absence of experience, what facts are relevant to your situation. The internet can only answer so many questions. It can be helpful to speak to an expert on starting your business, but ultimately the decision is yours.
Once you have decided to establish a new corporation, there are certain best practices that you should implement to ensure that your corporation runs smoothly right from the beginning. By being proactive, you can turn your mind to your actual business and avoid unpleasant surprises (such as incomprehensible letters from the government)
- Maintain all your incorporation documentation, either physically in a file folder or scan it to accounting/corporate folder on your computer. This will be very useful when you are asked for your corporate documentation, business numbers etc. by your business associates or CRA. I have been asked whether you need to keep an official minute book (a large black binder that lawyers will use to document all actions relating to the corporation). The answer is that you simply need to have the minutes – the form (i.e. file folder, minute book, saved on your computer) doesn’t matter.
- Always read any documents that you receive from the government and determine if additional action is required. If you don’t understand them, there is usually a number on the document that you can call to get more information. Avoiding government notices does not make the problem go away (despite our fervent hope that it will) and delays in responding will usually make the situation worse.
- For many small corporations, not much needs to be done, from a tax perspective. at the beginning in terms of accounting, sales tax, or corporate tax, as deadlines are often many months away. However, it is a good idea to set up an accounting system as soon as possible and to find an accountant. This will ensure that you are not scrambling at the last minute to meet deadlines and so avoid errors and/or penalties. Establishing a relationship with an accountant might take some time and they often take time to respond to new clients.
- If you register for payroll, filings usually need to be submitted monthly, at least in the beginning. It is important that you understand the deadlines and pay deductions on employees’ salaries by the due date. If not, interest and penalties for late payroll submissions are steep. There are a variety of payroll services that you can use to make this process easier.
- Determine how you are going to pay yourself, either via salary or dividends. If you decide that you will borrow money from the corporation in the beginning, ensure that you have a plan to either repay it within one year or declare it as a salary or dividend. If not, CRA will assess it as income that will result in unnecessary taxes (and of course interest and penalties).
- Keep all your source documents: receipts, bills, expenses, and invoices. Ideally, you would set up a paperless office, scan your documents into an accounting folder (using whatever organization system that works for you such as alphabetical or by category. ) so that you can access the documents easily. Alternatively, a physical filing system is also fine. Most accounting software will also allow you to attach the source documents to the transaction record.
- Ensure that you maintain enough funds in the corporation to pay your taxes. Once you register for GST/HST, remember that you are simply an agent of CRA. You collect these amounts on their behalf and pay them by a specific due date. These funds should not be used as cash flow in the business unless you are sure you will be able to repay them. It can be useful to open a separate savings account, where you transfer estimated sales tax payable; this also allows you to collect some interest.
- Be aware of tax deadlines, even if you have an accountant, and ensure that you respond to your accountants request for information as promptly as possible so that they have sufficient time to prepare and submit your tax filings.
- Most accounting and tax concepts relating to small business corporations are fairly straightforward. Since you know your business better than anyone, it is beneficial to understand these concepts so that you can better contribute to the decision-making process. If you have questions, your accountant should be able to provide some insights.
- Be disciplined with your business banking. Ideally, you should use your business bank and credit card accounts for most transactions. Using personal bank accounts, beyond a handful of transactions, can lead to issues with CRA. If you do use personal bank accounts for a few transactions, create an expense report within your accounting system and ensure that you maintain the documentation.
- When claiming expenses, ensure that they are reasonable and relate to the business. There are a number of “soft” expenses such as travel, vehicle expenses, meals etc. that should be accompanied by detailed documentation (such as a receipt indicating the business purpose of the transaction). Large amounts of expenses can raise red flags for CRA that can then lead to ongoing audits (and are deeply unpleasant).
Although a corporation requires more administration that a sole proprietorship, it is still fairly straightforward. The goal (which can really be applied to any situation) is to be aware of your obligations , be proactive and exercise sound judgement.
The post What You Should Know After You Have Incorporated appeared first on DBM Accounting | David B. McKeand Professional Corporation.
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