Running a small business is no joke. You are the boss, the stratagem designer, the book keeper, the researcher, the marketer, the public relations, the archivist, and the coffers. There is no one else to depend upon except you. For better or worse, every success and failure holds you at fault. How does a small business owner start off on the right foot?
For me, there is a lot of pondering, and research. What can I do? What skills do I have, and do I need? How much can I make? What kind of tools and space are required? What are other people in my field and adjacent fields doing? Half of the time, you won’t know what you don’t know until you jump in. I was lucky because my post-secondary institution supported my first foray into the market, but they don’t know everything that I personally will need to know. Nor do professors have the time to dedicate to just one person and their specific needs (although smaller class sizes help immensely with this problem), especially when people barely know what they require to flourish.
After my first diploma I participated in a summer student business program. A modest grant was given to students in return for said students working full time to run a business. I made a few mistakes, focused heavily on creating product, forewent marketing, neglected market research, general research, and was rained out of both festivals that I attended. It was quite the bummer, which I may elaborate on in the future.
Now, I am getting my feet back under me.
Firstly, I need a business name separate from my legal name. I don’t want to advertise myself as “Magan last name, Textile Artist.” It does not appear professional to me, because a human name can be easily dismissed. A business name is more like a title, and there is a little curiosity and mystery around a business name. “Why did you choose that? Is there a story there?” That attracts people, and appears more professional. Make sure that the name you choose is something that you will be happy with in five years. After a business name then there is a domain, a website, email forwarding (or separate email hosting), etc to acquire.
In Canada, a person can run a business under their legal name. If they want their business to use a separate name then they must register it. Registration lasts for five years, and can be done through two (and a half) avenues: A Master Business Licence (MBL) or as a Limited Liability Corporation (LLC).
A Master Business Licence (MBL) varies by Canadian province or territory. This article will use Ontario for reference. Generally, a MBL is an acknowledgement by the provincial/territorial government that an individual is using X name to run X business in Y province/territory. There is no federal MBL. The process is significantly simpler than applying for an LLC, is more affordable, and simpler for tax purposes. All income for the business is considered personal income for income tax purposes. A MBL does not provide a business number (BN), or harmonized sales tax (HST) number, and the owner must register for that separately. There is no legal protection that stops another person or business from using that same name. Nor is there protection for any legal liability that may occur.
A Limited Liability Corporation (LLC) is just that: limits. LLCs come in one type, unlike the multiple types in the USA. The Canadian LLCs can be registered federally or provincially. A federal LLC is slightly cheaper than a provincial LLC. They must have a NUANS report done before formation, because they do provide legal protection for the business name where they are registered (which might be important to you). If an LLC is registered federally then it may operate anywhere in Canada, but must also register in the province(s) and territory(ies) that it wishes to operate in. Want to operate in Nunavut and Ontario? Then the business must pay to register there, too.
What does a business owner — do I as a sole proprietor — get from jumping through these hoops? Primarily, limited liability, the ability to own multiple business names under one LLC, and access to government grants/loans (which I don’t have information on at the moment). The assets of the owner and the business are split for tax and liability purposes. That way, if a corporation encounters a legal claim and is sued, the owner of the business will not lose their house. This also means that the owner is paid a salary from the LLC’s coffers, and only pays personal income tax on that salary (keep in mind that LLCs also pay taxes, but at different rates).
An LLC might sound great, but in order to maintain that limited liability the owner must ensure that they have separate accounts for personal and business finances. This means separate email and bank accounts. If the finances between the owner and LLC are blurred, then there is legal precedent that the liability can be blurred, too. Banks will want a business to have a separate business number (BN) and harmonized sales tax (HST) number before they will open an account (although I don’t need to collect HST until I make $30,000 gross revenue in one year). An LLC is a lot of work, with rewards for the prudent and diligent.
The Ontario government doesn’t have a lot of details on the provincial LLC registration that is not hidden behind account creation for their “ONe-key ID” service. The same goes for the federal government website. For the details of the process I am flying in the fog, so I will work with what I have.
If I look at some maths:
MBL
Low cost, approx $60
NUANS $14 (optional)
Business Number $? (optional, for grants/bank account)
HST number $? (optional until $30k gross revenue, for bank account)
VS
LCC
Higher initial investment $300 provincially, $200 federally
Mandatory NUANs report $14
Federal registration must then register in province & territory $? x 1+
Mandatory Business Number $?
Mandatory HST number $?
Requires separate business account(s) $?
Consult with an accountant $? (optional)
Clearly the lower cost MBL seems more appealing, but you get what you pay for. Personally, I try to live by a “buy the good quality tool that will last most of a lifetime” mentality instead of the “buy the one that will do this single project and die” mentality. Will the LLC give me more “bang for my buck” than a MBL?
If I look at the perks:
MBL
Five year duration
Use a business name that is not the owner’s legal name
VS
LCC
Five year duration
Use a business name that is not the owner’s legal name
Province/Territory registration or federal registration
Legal protection for name in jurisdiction
Have multiple names registered under one LLC
Access to government grants & funding for corporations
Liability protection for the owner’s personal assets
Potential tax benefits & different tax rates
Separate accounts make tracking income and expenses easier
Transition to claiming HST is easier (accounts and numbers are set up)
Now I compare the disadvantages of each:
MBL
Province/Territory registration only
No legal protection for the business name
No liability protections
All revenue is personal income for the owner, modified by business expenses
Can be difficult to track income and expenses
Personal taxes become more complicated
Not really any different than just running a business under your legal name
VS
LCC
Higher initial investment
Greater initial setup
Greater learning curve (applying for grants, doing taxes, etc)
May want to consult with or hire an accountant ($$)
Need to track taxes for the purposes of collecting and claiming HST
There are services that will register a business for owners. They are about twice as expensive as the numbers listed above; however, there is a reassurance to know that they are professionals in ensuring legal compliance (read: mentally lay blame on them if something goes wrong).
Then what is the right choice for a me? It seems like there are two options: A federal LLC or a Master Business Licence. The provincial LLC doesn’t have much advantage over a federal LLC, and it looks like it is more complicated to move a provincial LLC into the federal jurisdiction (Yay paperwork!) than to start it federally.
If I believe that I will make enough to move up an income tax bracket after expenses this year then I should definitely register an LLC, and pay myself a salary.
I’ll let you know which one I choose.
Disclaimer: Not legal advice, I am not a lawyer, these are the opinions of an artist attempting to navigate the business and legal world