You’ve started your own business – a proprietorship to be exact. And with your first tax filing quickly approaching, finish your year strong by proactively preparing these few things to help with your filing.
But first, what exactly is a proprietorship?
A proprietorship is the simplest business form under which one can operate a business. It is NOT a legal entity, but a person who owns and runs the business who is personally responsible for the all the business’s debt.
This is the most common form of business because of its simplicity, ease of set up, and low cost to start. While the owner may register their business name as a trade name, it should be noted that this does not create a separate entity from the legal proprietor. Thus, the most distinct disadvantage of proprietorship is that the owner of the proprietorship remains personally liable for all the business debt.
What to report on your taxes?
Now that the definition is out of the way, the question focuses on how do you report your business income and pay your business taxes?
A proprietor simply reports revenue and expenses on their T1 tax return. The net income, or ‘net loss,’ forms part of the proprietor’s overall income that’s reported to Revenue Canada, along with all other income and personal tax deductions.
Don’t be caught off guard
There are a few things we’ve noticed new proprietors are often surprised by upon their first year of filing. Specifically:
- CPP Payments: Since a proprietorship is not a corporation, a proprietor doesn’t pay Canadian Pension Plan (CPP) on their business earnings throughout the year. When a proprietor prepares their tax return, they often forget that they need to pay CPP on their business earnings. Depending on the net income of the business, the CPP can easily be between $3000 – $4000 even without having a large net income. This is almost always a surprise for proprietors who weren’t expecting to have to pay Revenue Canada. For a small business starting out to have to budget for a $4K total tax bill can certainly be a challenge, but it’s not insurmountable. It just takes some planning.
- Savings: To help avoid surprises on how much tax owning you may have to pay Revenue Canada, we recommend setting up a savings account. Every time a client pays, allocate 10% for this account to store away for times you know you’ll need cash. This helps you not stack up liability to the government and keeps you in control of your debt.
- GST Remittance: Note, if your proprietorship has a GST number, you will have to pay your GST remittance by the same due date (April 30th) as your tax owing. Knowing this, you can better budget and control your cash flow to support these dues without hurting your business.
Start proactively growing your business
Hopefully, you’ve been preparing for your first tax filing all year. If not, don’t worry, but the sooner you can get in front of it, the easier it will be to manage.
A best practice we recommend for new proprietors is to put together a business plan that includes a forecasted budget where you can factor in things such as personal taxes and GST. This will help you:
- Understand how and why you’re going to grow your business
- Recognize that you may have income losses in the first few years…and that’s okay
- Better plan and budget for any income tax, CPP, or GST owning.
It’s really about getting in front of your numbers by researching, planning, reviewing, and involving the right professionals, such as an accountant or bookkeeper, so you can better understand what’s happening throughout any given period with your business.
Are you ready to file your first year in business as a proprietor or looking at building a business plan to help you increase your business’s probability of business success? Contact us at Priority Business Solutions to start a conversation!