Common mistakes of first time entrepreneurs
The best part of my job is that I get to talk to entrepreneurs everyday. When you get to speak to someone about what their passion is, it is always a fun conversation. I get excited knowing I am going to learn about a successful business or hear a new business owner explain their business idea. As you might expect, the conversation will always come back to the individual’s business and personal goals, and this is where I get to help them build a plan that’s going to get them there.
There is never a shortage of issues that keep business owners up at night, especially in the first year. I have come up with a few that you can take care of easily early on, so you don’t run into issues down the road. In other words, this is the “I wish somebody would have told me that“ list for entrepreneurs!
Managing The Money
This one seems pretty obvious right? (I hope so).
However, this doesn’t mean just making sure you HAVE money though. Now that you’re in business it is important that you have systems that keep your money and the businesses money separate. This applies to both sole proprietors and corporation’s alike. We strongly recommend at least a personal and business chequing account. Keeping separate bank accounts helps maintain strong records by giving you and your bookkeeper the ability to confirm those records from your receipts (reconciling). This applies to credit cards, lines of credit and online accounts like PayPal etc.
Having these accounts separated also helps you keep a pulse on the business from a cash flow perspective and can help you avoid any surprises in the flow of business funds.
Trust me, the extra couple of bucks on bank fees are well worth it when it comes to tax time!
Drawing Funds Properly
This is what it all comes down to. Most business owners are going to need funds from the business to support their personal lives and other goals. The issue I often see here is first time entrepreneurs drawing from the company without declaring or understanding the source. This is where the value really lies with a trusted advisor.
It’s important to note that:
- Salaries require withholding tax and a T4
- Dividends require a resolution and T5
- Management fees may require HST to be paid
The amount of tax and how its paid to the government for each of these may differ depending on which option is chosen
Drawing a salary or dividend will depend on your unique situation but understanding the difference and the requirements of each option is very important.
The Wrong Structure
When starting a growing business, you need to get the structure right. It is important that you think about the following items and discuss them with your accountant and lawyer:
- Is there a need to protect you personal assets? How much risk is there in your business?
- Is the business going to earn more money than you are going to need to live day-to-day?
- Are their tax saving opportunities available by splitting income to other family memebers?
- Is the benefit worth the cost of incorporation?
- Is there potential to sell the business?
The answers for every business owner will differ and so will their structure. Sole proprietorship, corporation, holding company or family trust are all examples of beneficial outcomes that can come from asking these questions early on.
Documenting “The other stuff”
Most new entrepreneurs know that they need to keep receipts, bank statements and all that fun stuff that comes along with keeping a good set of books. But some of the other things get overlooked.
Loans should be documented. This is easy if you are receiving a loan from a traditional source but it isn’t often well done when its done privately. If the loans are from someone other than the shareholder of a corporation than the loan often needs to bear interest. (There can be an unfavorable tax result if money is loaned informally from a non-participating spouse or family member)
Shareholder agreements should be in place along with employment contracts if there is an employee/self employment scenario and subscription for shares should be paid.
These are all examples of documentation that often gets missed than can have substantial impact on your business down the road.
Was this helpful ?
If you are or are thinking about being a first time entrepreneur, I hope you found some this helpful. My goal was to shine some light on areas that may not be too obvious in the beginning. Please leave a comment if you have any questions and for you experienced entrepreneurs let me know something you wish you had been told!