Article

By Josh Engel, CPA, CA, LPA, Partner

Starting a business is exciting, but it can also be a daunting task. Many will struggle to succeed because of mistakes made during the initial start-up phase. Here are some common pitfalls to avoid so you can get started on the right foot.

1. 1. Failure to Voluntarily Register for Goods and Services Tax/Harmonized Sales Tax (GST/HST)
      If you are operating a business that is entitled to recover GST/HST Input Tax Credits (ITCs), it is recommended the business consider voluntarily registering for GST/HST. Although an organization has up to four years to claim ITCs, they may not be claimed for amounts incurred prior to registering an account. Incurring significant expenditures prior to earning revenues in the early stages of many businesses is common. While a business is not required to register for GST/HST until its worldwide taxable revenues exceed $30,000, it may be beneficial to register immediately in order to recover the ITCs incurred during the start-up phase.
   2. Underestimating Initial Start-Up Costs and Required Cash Flow
      Initial start-up costs and cost overruns are not uncommon when starting a business. As the saying goes “you never get a second chance to make a first impression,” so it is essential that appropriate funds are expended to ensure the proper launch of the business and to ensure that sufficient operating working capital is available to fund the operations during the start-up and launch phase. As a result, when you are considering the financing that will be required for the business, projections should be conservative and include a contingency for unanticipated expenditures. In addition, to the extent that expenditures incurred are subject to GST/HST, there may be a substantial delay between the timing of the cash outflow for the payment of the GST/HST and the subsequent recovery of the GST/HST.
   3. Financing the Business by Failing to Remit Payroll Source Deductions and GST/HST
      When operating a business, you have the added responsibility of handling trust funds for Canada Revenue Agency (CRA), such as payroll source deductions and HST. In the case of a company, directors may be held personally liable for any unremitted payroll source deductions and HST. Failure to remit source deductions and HST when due may result in significant penalties and interest assessed, all of which are non-deductible for income tax purposes. Having said that, any interest incurred on an operating line of credit for business operations is fully deductible for income tax purposes. As a result, the business should use the operating line of credit to ensure payroll source deductions and HST are remitted when due.
   4. Failure to Seek Professional Guidance
      While it might seem like a luxury you cannot afford, especially during the start-up phase when funds are scarce, guidance from experienced legal and accounting professionals could result in tax planning and savings opportunities. Some tax planning topics for considerations are:

a) Utilization of losses incurred
b) Income splitting with family members
c) Asset protection from creditors
d) Future sale of the business

These are only a few of the considerations that should be taken into account when starting a new business. You may also consider various operating structures, such as:

a) Sole proprietorship
b) Partnership
c) Joint Venture
d) Corporation
e) Trust

As each situation is unique, you should speak with a qualified professional to assist you in determining how to address these issues and others that may be associated with starting your business.