You have registered your company. You have found the perfect, cozy spot to serve your customers. You have hired your staff. You have stocked up the shelves. You have put up the signs. And you are now open for business.
After a grueling period of working towards your business launch, the dust has finally settled. Now what? While you can still afford to sit back, and before you get fully occupied with customer-servicing, you can spend some time setting up some housekeeping procedures to set everything in motion when it comes to record-keeping.
Bank and Credit Card Statements. For small businesses, bank and credit card statements serve as the cornerstone for record-keeping. It is therefore imperative to maintain these two accounts separate from your personal account.
- Corporate or business bank account
Open a separate bank account for your business. Use this for all business banking. Try to avoid using a personal account for business transactions as this practice increases the risk of items being overlooked.
- Corporate or business credit card
Obtain a separate credit card to be used exclusively for your business (it can be a personal card, but different from the card you use for personal transactions). Use monthly statement as a way to keep track of expenses to be supported by slips with details of the expense (like name of the client, description of the item and so on). Slips should be filed regularly in files preferably by expense type. This will facilitate accounting based on the credit card monthly statements.
Cash transactions. All items paid for in cash are to be receipted and receipts kept. Ideally, expenses paid out-of pocket or personally should be summarized and reimbursed by the company by way of an expense report. The form should show detailed description of the expense. There should be separate envelopes or folders where items paid for in cash should be kept to facilitate accounting.
Home-office expenses. Personally paid items such as rent or home mortgage, interest, utilities, insurance, repairs, property taxes, condo fees, etc. should be tallied or at least closely estimated to allow proper calculation of business use of home/rent expense. Home office space should be calculated at the start of the business.
Vehicle usage. Car usage should be tracked to identify and collect information on all business-related trips. You should be able to calculate/estimate the business use percentage and total kilometres driven.
Vehicle-related expenses. All car expenses including loan interest, lease payment, car depreciation or capital cost allowance, gas, repairs, insurance license, CAA etc. are deductible expenses but need to be pro-rated based on the percentage of business use. It is therefore important to track all costs of car operations. Parking is generally 100% deductible.
Telephone and communication expenses. Long distance phone should be tracked to allocate claims. Separate business phone line, cellphone, internet bills are all deductible. Bills for home phone lines are not claimable.
Document-keeping. All source documents should be filed according to expense type or supplier reference to facilitate location should questions arise or if bank and credit card records are not sufficient. This need not be filed as a monthly breakdown; yearly filing is fine.
Corporate year-end. Determining fiscal year-end for corporation is flexible during the first year of operations as no pre-setting of fiscal year-end is required until the first tax returns are filed. This decision depends on profitability and the possibility that income from employment or other sources will come back into earnings in the near future.
Unincorporated entities’ year-end. For sole proprietorship, self-employed, and partnerships, it’s a calendar year-end: December 31st. If you are an eligible individual, you may be able to use an alternative method of reporting your business income that allows you to use a fiscal period other than calendar year-end, but you will have to make a reconciliation of business income for tax purposes to calculate the amount to report in your year-end personal tax return.
Corporate earnings. It makes sense to leave surplus income in the corporation. It provides an opportunity to pay lower tax rates (approximately 15.5% for income eligible for small business deduction generally up to $500,000) on the taxable income while it remains in the company’s books. Personal taxes will only be imposed and payable when funds are actually paid to the owner/s in the form of dividends and/or salary. Tax rates are so designed to ensure equitable taxation across the different business structures (corporation, sole proprietorship or partnership) so that the total corporate plus personal taxes never exceed regular personal taxes.
Incorporation versus unincorporated business structure. In deciding whether to incorporate or to remain unincorporated, from a taxation standpoint, considerations need to be made with regard to the possibility of short-term losses (which favours unincorporated structure), size of business, family ownership, income splitting, estate planning and other considerations.
Year-end preparation. By using the above suggestions, accounting and bookkeeping costs can be minimized at year-end. Organize your year-end documents as early as possible. This will give ample time to plan ahead and ensure that total corporate and personal tax burden are minimized. This will also allow the most time possible to plan for the use of taxes recoverable or to ensure that funds will be available to cover the taxes payable on due date.