Business Accounting Tips for New Entrepreneurs | Dan Grijzenhout | Skillshare

Business Accounting Tips for New Entrepreneurs

Dan Grijzenhout, Over 35 years of business experience

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3 Lessons (15m)
    • 1. Business Day One? You Have Already Made an Income!

      5:09
    • 2. Should I Incorporate? If So, When?

      8:52
    • 3. Congratulations

      1:09

About This Class

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Start a Home Business Chapter 2 - Business Accounting Tips for New Entrepreneurs

In this class, I start out by showing you how and why you actually make money just by starting a home business.  I then provide you with a further lecture on incorporation your home business.  It discusses the pros and cons to incorporation and offers advice on whether or not you should incorporate and when it might be a good idea timing-wise to do so.

See you on the inside!

Best wishes,
- Dan Grijzenhout

Transcripts

1. Business Day One? You Have Already Made an Income!: Hello and welcome to this video which I title your new business Day one. You have already made money. So that based the question. Why have you already made money on the first day of your new business venture? Well, let me explain that for you. Ah, home business automatically is able to deduct as expenses the full cost of doing business. So this means that if you're working from your home a share of your home space and home operating costs can't be charged against the business when you file your annual tax return , the next point is that anything you use at home for your business, such as your computer, your Internet connection, ah, share of your utility costs etcetera immediately becomes tax deductible on your standard personal tax return. So this means that you can deduct these expenses from your earned employees net income on your tax return. Even if you have earned no revenue in your businesses yet, you will now pay less taxes on even the salary didn't come you have earned at the end of the year, so expect to refund. Oh, and by the way, this additional refund can help you fund your initial business start up costs. So let's take a look in more detail at the mathematics of this through the next couple of slides. If you add an overview of an employee tax return, the math goes like this. You were in a salary. You deduct your personal exemptions, your personal deductions and you come up with a taxable income. Now, just for sake of calculation, let's say the tax rate is 30% your now paying tax to them for that 50,000 income of about $12,000. On the other hand, if you are self employed and here's the big key toe differentiator on this, you start out with that $50,000 income. You take off your personal exemptions, you take off your personal deductions. But then you also get to deduct your business expenses. Now your taxable income amount is much lower for using the same effective tax rate of 30% you're paying tax of only 7500 instead of that 12,000 plus on the example before. Well, what kind of things can you now deduct that you couldn't as an employee? Well, you can deduct your share of auto expenses and gasoline, auto, depreciation, rent or mortgage relating to having a NAWF in your in your home. So that percentage of your space that you're using for your businesses all deductible as of the share of all related home utility costs, telephone, etcetera, Internet costs, advertising costs, office expenses, business meals, uniforms, shares of auto and home insurance. All of these things are eligible deductions from your tax return in figuring out your taxable income. And that is a major major difference between an employee who who can deduct none of this and a self employed individual who could deduct all of that. So final comments on the mathematics part of the equation. As an employee, the tax department gets more of what you earn than if you are self employed, so there's more money off you as an employee. The key tax differentiators allowable business expenses. Example. One. A really clear way of differentiating is, let's say you're an employee and you drive to work. You get no deduction for that. You're basically in the cost of your vehicle in the gas and everything else to get there. If you're self employed contractor driving to a project location, you can deduct the gasoline, the vehicle repairs the license costs. You can appreciate the value of the vehicle you're in when you're filing the return. If you're out of town, you can depreciate all the hotel bills, etcetera, etcetera. So the tax department, by this structure basically is making good money off the employees. But allowing the self employed person who are risking much more by not having a steady monthly paycheck, they are rewarding them to allow them to keep more of what they Why did they do this? Employers create jobs for those that want to be employees. Self employed people often become employers, hiring employees who the government can then make the returns on tax wise. The tax department recognized self employed have no job security, no pensions, no holiday pay or other employee benefits. And so they're cutting him a break on that. And the tax department recognizes that self employed must regularly be marketing their next engagement, working to get their next sale there. Next project, etcetera. And so they make allowances for that. I hope you've like this quick dip. Thank you for watching this video and bye for now. 2. Should I Incorporate? If So, When?: Hello, everyone, then rising out here again. And today I'm going to discuss with you the pros and cons of proprietorship versus becoming a corporate entity as you embark on your entrepreneurship career. First off, let's start with proprietorship advantages. This is, in effect, the cheapest way to start a business. Usually you can get into it for, you know, just 100 to a couple $100 to, in effect, register it and get it eligible to conduct business in a local area. So that's one of the biggest advantages for proprietorship is that it's the cost of entry is very small. The accounting for it also is much simpler. And one of the really cool things about it is that if in like, say, the first year or two, you have in effect losses in your proprietorship net loss. At the end of the year, you can actually deduct this loss against employment income in your personal income tax returns. The other advantages. All revenues and profits go directly to you. Don't have to worry about dividing things up to the shareholders and whether you could do it as dividends or stock or anything like that. You don't have to worry about the salaries er or things like that as well. Proprietorships have the lowest amount of regulatory burden and reporting corporations much more sophisticated. A lot more paperwork, a lot more things you have to tell them about your business. Also, corporations have to file a number of different types of returns that the proprietorship doesn't such as a corporate annual return in expensive. But it's more work. You also have to get G S, T and payroll accounts, where in some situations is a proprietorship. You may not have to, but that's something you need to check into based on the type of business you're running, where and how you're running it. For example, I did a business those based in Canada. All my clients are us, and I ultimately got a CR a exemption to run that business. I did not have to have a GSD account and charge GST on things. So it's basically situation als specific with respect to whether or not you need a GSD account or not. You could also save some money on the employer shares of CPP and EI. If you're working as a corporation, a lot of people choose to take salaries or have salaried employees. And there you have the employer share of CPP and EI that you have to pay in addition to what the employees is paying disadvantages to proprietorship. Well, you've got Unlimited Liability Corporation actually shields you from that to the extent of the assets of the corporation. In most instances, if you are a proprietorship, every debt you incur you are personally responsible for. Also, because of this as a proprietorship, you have a little bit more time or a little more difficulty arranging third party financing and investment capital that if you need something in order to achieve your goals, corporations, on the other hand, they can privately issue stock. They can go to the banks and more readily obtained capital there for from angel investor organizations, etcetera. So it's much easier for them to get money than it is for a proprietorship. Also, corporations can elect to go public at some time. In the future, Proprietorship needs to become a corporation before it is able to do. This income is taxed at your personal rate as a proprietorship, which is most often higher than corporate rates as revenues and incomes increase, so there are tax advantage to being a corporation. Also, a corporate business name once established is protected. You have no such strength of security with the name of a proprietorship. So a corporation they do the additional name searches for your state, province or country, depending on where you choose to operate. And you have that protection of your name advantages to being a corporation. Well, there is limited liability of directors and officers of the corporation. In most instances, it is an entirely separate legal entity from use. And, as I mentioned before, the business aims also protected easier to raise capital. And there's more mechanisms available to do it, including classes of shares, common preferred voting, nonvoting, etcetera. There's many, many ways that you can obtain capital for your Corp. The ownership is transferable and more easily saleable, and it will continue beyond the death of the person. Creating the entity proprietorship in most instances will not unless the will stipulates that it will move to another family member or something. So keep that in mind that the corporation will survive the death or unexpected death of the individual that one of the corporation taxes are often less than what proprietorship is and will have to pay, and you can issue dividends to stakeholders. Now, I'm gonna have ah presentation coming to you on dividend tax credits in this series. I have found it to be an extremely good way to take your money out of your corporation and pay very, very low personal taxes on it in your personal returns. So be looking for that presentation coming up soon. Corporate disadvantages cost a start up is higher than for proprietorship Member. I had mentioned about 100 to $200 for a proprietorship. Corporations probably gonna run you in the at a minimum $1,502,000 range, and you can do it either through a lawyer or through an online incorporating website. But you're still going to be looking at usually at a minimum, about $1500 to get it started up and get all your minutes, documents and everything else created. Corporations have much more extensive recordkeeping, required balance sheets, income statements, source and use of funds returns on payroll on G S T year and reporting annual reporting. Your filing a separate return from your personal entities, and I've got to tax returns to fill in, and the corporate one is much more intensive. Ah, lot more work. People that are not knowledgeable in accounting and tax returns often have to hire that out to 1/3 party in order to get that job done. So there's more cost incurred there as well. So keep that in mind. Business losses can't be written off against shareholder incomes, as in the case of a proprietorship, so you can't get that extra tax benefit on your personal return. If your corporation suffers a loss, it lives, eats and breathes on its own accord and more complex to manage and operate. You now have to define your shareholders, your directors, your officers, your classes of shares issued. So there's just a lot more work involved in the corporate side of things. But as I mentioned before, the tax breaks, as you start making money will often make that worth the transition. A few personal thoughts on this Well, if you're in a business of low financial risks and possible lawsuit from outside parties, there really is less pressure on you to incorporate. So don't be thinking I got to go protect myself if I'm really not in the kind of business where it looks like I'm going to get sued any time soon because one of the reasons that people do incorporated so that they can set up a second legal entity to avoid personal financial exposure if things go wrong. Another reason for the incorporations in the instance where incomes and profits are becoming significant, then you're gonna want the lower tax rates and incentives that a corporate entity will provide you. So that's a good time to think about starting to do. Your Inc. Third reason for incorporation is that if there are multiple stakeholders involved, it's probably the best way to go that way. Everyone's exposure is limited because there's gonna be more than one person making decisions in the corporation, and they can affect the well being of others. If they make a poor decision, you're all liable to cover it unless you're in a corporate structure where the losses air limited to the extent of the assets and income etcetera of the basically the net worth of the corporation and again corporations survived a person's death. So if you've got three or four stakeholders in the corporation the others will be able to carry on without any difficulties if if one of you is no longer in the picture closing comments, well, individuals usually start out of proprietorships, and they evolved to become corporations as their businesses grow. If you have partners in the business, consider becoming a limited liability partnership to minimize your personal financial exposure. I didn't discuss LLP's in this presentation, but information's out there and you can research it on the Internet. If you become a one person or small corporation considered taking dividends as opposed to salaries from the corporation. Even Candid Revenue Agency recommends that strategy. And I will be doing a video presentation on this later on in the Siri's. If the first year or two of business show loss. Or you know that you're putting in some investment capital that is going to put you in a negative position for the first few years, don't incorporate yet use those years to offset your employment income with the losses of the new business. You're starting and you're gonna get some nice tax breaks from that. So that is definitely worth the considering, and it's a strategy that I would employ in any event. That's the end of this particular presentation that we created in this series 3. Congratulations: Hello and congratulations on completing this class. It's great to see and making it all the way through. And I hope I was able to give you some useful and lasting knowledge that will help you and whatever you're wishing to achieve. If you're liking the content that I'm creating, I'm very much looking forward to seeing you in more of my classes, which you confined in this site by going to my profile section. You can still reach me through this class. If you have questions by starting a discussion with me, I'll be more than happy to respond if I hear from you. A second thought that comes to mind is that if you have appreciated the content I have created, please give me a thumbs up where and when the site ask you to to rate my class. This helps me trend better in the system and helps me to reach more people who could benefit from the training I'm trying to create. And if you choose to share the class link with friends or anyone else, thank you for that additional support for my creations as well. Bye for now,