GERRY’S BLOG

FAQ: How do I decide if I should incorporate my business?

First of all there are three types of business structures - sole proprietorship, partnership and corporation. In my view most entrepreneurs should steer clear of a partnership - just too many pitfalls, relative to any perceived benefits.

Therefore the choice is really between a sole proprietorship and forming a corporation. If it is just you in the business you have the choice; if there are others, then the only real choice is a corporation.

So, let's look at some reasons for you to be a sole proprietor.

To begin with, a sole proprietorship is more easily formed (basically register a name and obtain any licenses required); the financial records are simpler (but still lots of records to keep); the income taxes are simpler to file (but still complicated and convoluted for sure); and if you have a loss from the business you can likely claim it on your personal income tax return (if you have taxable income of course).

I bet that last sentence got your attention.

But hold it a minute. Don't get the idea that you are going to turn your interest in tennis into a sole proprietorship so you can claim your losses against your personal taxes - it doesn't work that way.

There is something called the REOP (Reasonable Expectation of Profit) that will likely prevent this, but this is a topic for another blog.

OK, back to your question. How do you decide?

In my opinion, in most situations, incorporating is the overall better alternative. The corporate tax rate on the "active business income" of a small business is lower than personal taxes; you have more flexibility on how to pay yourself (wages or dividends for example) and there are more tax advantages with a corporation (the lifetime capital gains deduction and certain investment tax credits, for a start).

Since a corporation is a separate legal entity, any business related lawsuits (by creditors or others) would be against the corporation, not you personally - at least in theory. In practice, there are exceptions and often creditors will require your personal guarantees on loans. Still, incorporation can provide some protection to you.

So, am I suggesting that you should incorporate?

Well, it depends. There are other considerations.

If the investment in your business is relatively small and you do not want to spend any more money than absolutely necessary, you likely should operate as a sole proprietor, at least until you get a sense of how successful your venture might be. If need be, you can always incorporate later.

However, if you have just quit your job and invested most of your savings in your new business, then incorporation may be in order, especially if you think you may need additional venture capital to grow your business.

The fact is, incorporating is often a personal decision. Certainly size matters and larger companies are just about always incorporated.

However, when I started Peters & Associates Ltd. (PAL) some 17 years ago I chose to incorporate right at the start: I liked the idea that PAL was a separate legal entity from myself; I thought "Ltd." was kinda cool; I knew that I was in this for the long term; and I also knew that I did not need to hire a lawyer to fill out the paperwork to incorporate.

For me it just seemed right. It still seems right.

But enough about me ... what about you?

If you are still not sure, a sole proprietorship is likely the right decision for you, at least in the early stage. As I said, you can always incorporate later on. Don't worry; most of the benefits of incorporation won't be lost just because your business started out as a sole proprietorship.

My next blog will consider the question "I would like to apply for the New Brunswick Small Business Investor Tax Credit Program, but it looks complicated.  Is it really worth the effort?"  Stay tuned!

FAQ: I am in the very early stage of considering starting my own business; do I need a business plan?

Let me be really clear about this.

Yes you do.

OK, I'm a consultant so you likely expected that answer. Let me explain.

But first let's rephrase the question to "how detailed should the business plan be?". Quite plainly it needs to serve the needs of the person for whom it is written. If it is just for your use then details are less important, concentrate on the big picture.

I would suggest you begin by writing down the concept as if you were describing it to a friend (one who is not a banker!). What would you tell him; what do you think he would like to know?

I think he would like to hear about the product. Describe it to him. Don't worry about all the stuff experts say that should be in "the plan" - just describe the darn thing! Its your idea ... you probably have lots to say about it. Tell your story. Write until you can't think of anything more to say (at least for now). Then go back and read what you have written. Did you capture the essence of what your business concept is all about? Does it get you excited?

Go ahead and do a bit of editing. If you did not talk about the price you will be charging for your product add something about it now. Hopefully you described how you were going to place (distribute) your product in the market and how you were going to promote it to potential customers.

Congratulations! You have just completed the first draft of your first business plan. Still excited?

Reality check. I said first draft. A business plan is a living document and needs to evolve as it develops. What you have written is more accurately described as a draft marketing plan; the marketing plan is the fundamental building block of a business plan. At this stage you are more interested in describing the concept ... let others read your plan ... get their feedback. Continue to add to the plan as you answer their questions. 

If you are still convinced that the business idea is sound you are ready to move to the next phase of putting your plan in a more formalized form. The questions get harder and the answers are longer but now your entrepreneurial adrenalin should be kicking in. Check this website under business planning for a business plan framework that will help guide you.  

The key message of this blog is that business planning is essential but if you start in smaller steps you will be ready when it comes time to run.

My next blog will take a look at the question "I asked my bank for a business loan but they want to see my business plan first ... do I need to hire a consultant to write it?".

My answer may surprise you. Stay tuned.