Starting a Business with Ryan Mallough | E012
Full Transcript:
Jason Pereira: Hello, and thank you for joining me for The Wisdom of Wealth, a show where we helped educate Canadians about fundamental financial literacy topics, and to help you make better and more informed decisions, and to know when and where to reach out for help. I'm your host, Jason Pereira. Today on The Wisdom of Wealth, we're going to talk about the basics of starting a business. So you decided to start a business. Congratulations. It can be difficult. And the first decision you have to make is what structure your business is going to take. Most people think that they're going to incorporate a business to start, but that's not always the best fit. There's actually three ways to register your business. A sole proprietorship, a partnership, and a corporation. And we're going to talk about all three of those and which one is the best fit for you today.
Jason Pereira: A sole proprietorship is the simplest form of business structure. It's very easy to set up. You can go online and register one yourself. What you're doing is you're registering a legal name under what you're going to partake in business. With that, you can carry on business, sign contracts, open accounts, and when tax time comes around, all you do is you add the business's income onto your normal income when you file your taxes. And your expenses are basically deducted from that income. If you have losses in your business and you're still working somewhere else, the good news is, is that you can actually deduct those losses against your other income. So it can be very valuable when you're starting out to start out as sole proprietorship. And there's no need for separate financial statements or tax filings, but there are downsides. Sole proprietorships can be hard to sell. After all, you have no real structure to the business other than you're carrying on transactions. There's no credit protection. So if basically someone sues you, your assets are exposed, but this is where insurance comes in.
Jason Pereira: The second form of business registration is a partnership. This is pretty much just like a sole proprietorship, except with, instead of having one business owner, you have multiple. And you can have as many as you want in this case. You have multiple partners, no problem. Again, very low cost way to do things. And you just go online to register your legal business operation and conduct business under that name. And when it comes time for taxes, you split the income amongst yourself and the partners, as well as the expenses. It's very straightforward. But just like with the sole proprietorship, there's some disadvantages. Again, it can be hard to sell one of these businesses. You need some form of partnership agreement for how you're going to get in and out of business with your partners, and also again, your credit are exposed, meaning that if someone sues you, your assets are potentially exposed. But again, this is where insurance comes into play. Always have insurance. We'll talk about that later.
Jason Pereira: The third form of registration is to set up an incorporation. A corporation is a separate legal entity that you can register online yourself, but frankly, you should use a lawyer as there's more complicated filings to make. And this separate legal entity can own assets, take out loans, and enter into business arrangements on its own behalf. You are not the corporation. It is its own separate thing. As for control, it's divided up amongst the shareholders. If you own all the shares, you're the sole shareholder. If you have partners, those shares are split amongst a number of people. One key difference between corporation and a sole proprietorship is that there is credit protection. Meaning that if someone tries to sue the business, your assets personally are protected unless you basically have conducted fraud or you signed personal guarantees on those loans or whatever people are suing you over.
Jason Pereira: There's a big advantage when it comes to taxes also. There's a lower rate, but not if you take it out. So if money stays behind the business, you will pay lows teens in terms of taxes. But when you take it out, it's the same thing as if you earned it personally. So there can be a benefit to deferring taking out income in the future. It's also very easy to sell. You can sell shares, whereas when you're dealing with a sole proprietorship, you're really just selling a list of clients, if that. Also, when you do sell your business, there is a big tax benefit, something called the lifetime capital gains exemption. And if you structure your business properly, you can benefit from up to $883,000 tax-free at time of sale.
Jason Pereira: Now, there are, of course, some downsides. The first is you have to maintain separate financials. You have to update minute books regularly. You have to file a separate tax return. And you have to keep in mind that what the corporation owns is not yours. It's the corporation. Even though you own the corporation, you can't just treat it like your own little piggy bank. There are personal tax implications for that. And there are some limited opportunities for income splitting that have been generally taken away. Meaning that before used to be able to basically put money in your spouse's name. Now, unless they're there working in the business, you really shouldn't try that because the government comes down pretty hard on that.
Jason Pereira: So regardless of how you organize your business, there's a few general considerations you have to take. The first is sales tax. If you're going to bill for more than $30,000 in revenue in a year, you will have to remit an HST return in Ontario, which means you need an HST number. You can file for this at the time of incorporation or later on once you cross the $30,000 threshold. The second consideration is insurance. As I mentioned earlier, when you conduct business, you are liable to conduct that business the way you're supposed to. And if you don't, you could be sued. So be sure you have the proper insurance in place for your type of business and industry. If you're conducting business from your home or using your car for business purposes, be sure to disclose that to your insurance company, because if you don't and something goes wrong while you're conducting business, you might not be covered. If you require a permit to operate your business, be sure to file for those as well.
Jason Pereira: Small businesses are the lifeblood of every economy, but oftentimes it feels like as a business owner, no one is out there supporting you. After all, you don't have teams of attorneys, specialists, employees, even to start, that are out there looking for the best deals for you, lobbying on behalf of government change, or doing any number of things that would help support your business. But there is an association that you can join that helps meet the needs of Canadian businesses. This is the Canadian Federation for Independent Business or CFIB for short. And to tell us why you should look into joining and how they can help you as a business owner, I've invited my colleague, Ryan Mallough into the studio today to talk about it. Ryan Mallough of the Canadian Federation of Independent Business. Thank you for joining us in studio today.
Ryan Mallough: Thanks for having me.
Jason Pereira: So tell us what it is you do.
Ryan Mallough: So I work at the Canadian Federation of Independent Business and I am an advocate on behalf of our 110,000 members across Canada, 42,000 here in Ontario, at all three levels of government. So we represent a voice for business at the municipal, provincial, and federal level. And in addition to our advocacy work, we also provide advice for small business owners who are just trying to navigate the multitude of government rules and regulations that affect their everyday operations.
Jason Pereira: And that's a very important point because there are all kinds of rules that frankly, the government puts the onus on business owners. It's up to you to note this stuff, but there's no manual they give you when you register a corporation or would receive a sole proprietorship. So it's all left to your own devices to figure it out. So we'll visit that in a second. Let's start off with the foundation. So someone wants to start a business. I know you have some resources to help them with that. What are those and where can they find them?
Ryan Mallough: Yeah. So first and foremost, I'd say check out cfib.ca. It's a good place to start and sort of get a feel of, of what it is you need to know off the bat. I mean, we know flat out, no business owner gets into operation to be an expert in government compliance. That is not why you sign up to do this. We know that. So what we try to do is, is help you out with that so that you can focus on what it is you're doing best, which is running your business. In addition to what we have online, we also have a hotline that business owners can call into to get direct advice. So we have a team of about 20 to 30 business counselors across the country, and they can help with any question under the sun when it comes to hiring, helping drop an employee contract, templates for various things, what they have to do when it comes to health and safety.
Ryan Mallough: In addition to doing some of the things that owners really don't have time to do, like spend time on hold with the CRA or calling into the employment standards hotline to get your questions answered. We know business owners don't have time to do this. So we can do it on their behalf, get that answer back and make sure they're compliant. Because at the end of the day, that is the name of the game. Not being compliant with government rules and regulations can come at a significant cost, especially when you're a new business, it can halt your operation very quickly. So it is crucial. And that's what we're here for. We're here to contribute to your success, whether you're just starting up or whether you've been in business for years.
Jason Pereira: Yeah. And the first point you made there about knowing it's in the business and to be in the compliance business. The reality is, is you're a manufacturer, you're a service, you do something and you're good at that, whether it's cooking or building and you get into it for that. And no one ever basically teaches them how to be a business owner, let alone all the things they have to do. And in your point about it can bring your business to a halt. It's the unknown, unknown. It's the stuff you don't know that's going to basically result in you getting fined, penalized, a bad reputation, whatever it is. And if you can help prevent that with a hotline, I mean, that's fantastic. So that's the basic piece of it. So let's talk about some of the other benefits. So you have that hotline that helps people kind of navigate the chasm. And I think the best advice there would be just basically, if you're doing something for the first time, call you guys? Does that sound about right?
Ryan Mallough: Absolutely. Give us a call and we can help walk you through what it is you need to do. If it's something that you have to do at all, I think a lot of business owners sometimes are so worried about being compliant, they may be course-correct too far to the other side of it. And again, we can also help make those calls that you don't have to. And again, we know and we tried governments all the time about how long hold times last for, so it is something that we can do on their behalf.
Jason Pereira: Anyone who's ever called CRA knows that pain. That said, I mean, a lot of business owners also, they get told stuff by their people. We always get told people, "Maybe you need to look at whatever." And as a financial advisor, I hear all kinds of myths. I can't imagine the things that you guys have heard that are just not true. So beyond that, there's also a lot of ancillary benefits to membership. So can you tell us what else comes with membership in the CFIB?
Ryan Mallough: Absolutely. We really function on three pillars. The what we call business resources, that hotline and that sort of help. That's one of them. The second pillar is savings programs. We have 110,000 members across the country. There is purchasing power that comes with that. So we can help out with things like managing your payroll through a system like Payworks, where we can provide a discount. We have teamed up with Scotia Bank to provide a discount around business banking. Credit card payment processing through Chase, as well as low rates with MasterCard. In fact, recently we came to a deal with MasterCard that gives our members the same rates that companies like Costco and Walmart get, because combined, our members do about the same amount of sales around $3 billion in credit card processing as those companies do. And as a not-for-profit, we pass 100% of those savings on to members. Again, anything we can do to help contribute to their success.
Jason Pereira: Hmm. Yes. That's huge because I mean, those rates started off at 2.75% to higher, depending the credit card you're using. And frankly, if you can even shave a 1% or close to that off, that is a substantial difference in people's revenues. So thank you for that. So before we get to the third piece, and that's kind of the bigger government piece, and we're going to get into a lot of your history there, what's the cost of joining the CFIB?
Ryan Mallough: Membership starts around $300, and then it goes up based on the number of employees that you have. But I will note that any one of these savings programs almost pays for membership in itself
Jason Pereira: That's what I was getting to.
Ryan Mallough: ... in addition to, and if not the savings programs, and we know that those aren't for everybody, but even the compliance costs. We've had run-ins where we've had employee employers looking to deal with someone who was going on mat leave. And if that is mishandled, you open yourself up to some significant liability. And one simple call to CFIB can save you lawyer fees, potentially court costs, and a lot of headaches down the road as well. So again, it's a long-term investment, but I think it's something that really does wind up paying for itself.
Jason Pereira: Yeah. And really, I mean, of all the cost of business sees when they starting up or when they're operating, something like that is peanuts. And as you said, if you can pay for that through the savings on one of your partnership programs alone, and then have kind of the "insurance" of that phone number to call, and in case something goes wrong. I mean, you just gave me an example of something routine. I mean, what happens when an employee gets dismissed and they get combative about the thing? Or if you're getting ready to dismiss a problem employee? A lot of people are going to have to call up a lawyer and spend some real money, far more than they would probably pay you in order to get that advice. And they will just get that as part of membership. Right?
Ryan Mallough: That's exactly it. And again, the things that you'd think are routine in the fun regulatory government world that we operate in, aren't always routine. Another example, we had an employer call in, they caught an employee stealing and wanted to terminate, and I will warn that it is never just as simple as saying, "Okay, you're fired." That there is a process that you have to go through with termination, especially depending on how long the employee has been with you, that making the decision between terminating with cause and terminating without cause, what the financial implications are there on either side, and making sure you get that right, because if you don't, you could have an employee who's combative. You could have one that comes back with a lawyer and you're going to see those costs go up very quickly if that's the case.
Jason Pereira: Yeah. And it's, again, the onus is on the business owner. I mean, a lot of people think, "Well, I'm the boss. I get to do whatever I want." And no, there's a bunch of these things called rules and laws that get in the way of that. And that simple example of someone literally stole from you or someone endangered or harass someone else on staff. You would think that that kind of immoral action would result in immediate termination. And yes, it can be grounds for that, but if you don't check all those boxes, then you're going to be in trouble.
Ryan Mallough: Yep. That's exactly it.
Jason Pereira: Yeah. So the last piece and the big, I think your third tentpole here, and when I find incredibly valuable, that you guys don't get rewarded enough for in the public for this, is your advocacy for business owners. So tell me about basically what that entails, and then I want to talk about some of the success stories you've had.
Ryan Mallough: Certainly. So this is where I operate within CFIB. I'm on the advocacy side. And frankly, again, as a business owner, when you don't have time to become an expert in government compliance, oftentimes too, you don't have time to individually go to your city councilor or your member of provincial parliament or your member of federal parliament and let them know what is on your mind or what issues are affecting your business. That is where we come in. We are one member, one vote. We survey our membership regularly to get what it is they're feeling on the ground. What's affecting them, what's working for them, what's not working for them. And we take that feedback to government and use that to drive change. And there's really no better example of how that works than during the time period we're living in now, in the COVID times.
Ryan Mallough: We have been at the forefront of things like the 75% wage subsidy that's come into play. We've been at the forefront of the, the business loans that have been to play, including expanding those to not just incorporated businesses, but sole proprietorships. And we've also been on the forefront of getting the rental program fixed, which again is something that we fought for, but recognized and heard very quickly from our membership was not working. And we're able to take that feedback from government and get change. So that is a major driving factor. It really is the foundation of CFIB, but we are in business for your business when it comes to dealing with government. We want to make sure that your concerns are being heard as loudly as we know the concerns of bigger multinational corporations are being heard. So we are there to be someone in your corner and to be your voice with government.
Jason Pereira: Yeah. I mean, that's the thing. Multinational companies have large budgets for lobbyists and whatever else they might have. And at the end, they basically employ fewer people than small business does. They have a smaller impact on economies and small business does. If you look at the statistics on where economies are driven, it's always through entrepreneurship and small business. And again, you guys have done a wonderful job on that side. Most recently, I mean, you guys have been tireless. One of the reasons why I brought you on the show was to bring that to light. But I mean, beyond that, you've been doing this for how many years now?
Ryan Mallough: We're coming up on year 50, 2021 will be our 50th year.
Jason Pereira: Yeah. I mean the simplest example I would give people is that capital gains exemption on the sale of your business, you pour your blood, sweat, and tears into a business, into your corporation, and eventually to the point where you can sell it. And a portion of that can be tax-free. I mean, that's been around for a long time, but that was your lobbying that basically helped create that entire exemption.
Ryan Mallough: Absolutely. And something that we continue to push for and to make sure that it's indexed to inflation and continues to go up every year. So you're not seeing a bracket creep. In addition to that, I mean, things like our founding issue was the small business tax rate where under Pierre Trudeau, there was a white paper from the government looking to set that at 50%. it is 9% today. And it is 9% because we fought to get it down from 11% in 2018.
Jason Pereira: Yeah. And let's address the important issue because corporate taxes are a touchy subject a lot of people get bent out of shape about, but let's talk about the reality of that. If people hear that and they think you're not paying your fair share, I'm paying way more than that. But where does corporate money go? Let's be honest about this. It goes to either pay for more equipment. It goes to pay the individual or business owners who work there, which are salaries that employ people. And then if it goes to the bosses already making a lot of money, he's paying, in Ontario 53% of that money. It goes to dividend, the same basic thing. So it's not like they pay 9%, we pay 9% of small business owners. And that's federally, by the way, it's a little bit higher when you factor in the provincials, but it's not like we take that money, then hoard it away with these greedy fad cats. The reality is, is that money gets reinvested in the growth of business or in taxation. So we all benefit.
Ryan Mallough: Absolutely. And we know that that's the case when it comes to tax savings, we know that that's the case when it comes to regulatory savings. If we can reduce the fee for a permit, that is more capital that gets freed up for the business to again, reinvest in new equipment, invest in their employees, hire and grow and expand their operations. So it's critical. And I mean, again, government means well, but they don't always understand what the realities are on the ground. And again, that is where we, in taking our members' feedback, come to the government and let them know that this is what is happening on the ground. This is what this policy change is going to mean for them, good or bad, and why you need to adjust in a new direction.
Jason Pereira: And a few years ago, you had to do that very adamantly because of the small business changes that they tabled the one point that frankly would have been catastrophic in my opinion. And you guys fought back very heavily against them. Some of them got passed in a reformed way, but in general, you're right. The lens that a lot of people have is that business owners are making all this money. When we look at the average small business owner in this country, and the stats show that they're making, in some cases, if they're unincorporated less than the average employed person, and if they are incorporated and successful, nevermind the people who basically never make it, they make it and then the business falls apart.
Jason Pereira: They are making more, but they sacrifice a lot to get there, including potentially risking their homes and spending less time with their families. So, yeah. Is it warranted? It depends on the individual, but when you live in the cloud of government, sometimes you just don't understand what it is to live through the life of running your own business. So I thank you for that, quite honestly. So once again, where can people find you and give us your sales pitch on why to join. I mean, I think we just did that, but sum it up for us.
Ryan Mallough: You can check us out at cfib.ca. I will note that we are offering introductory membership right now as well. So you can give us a bit of a trial and have access to our hotline and our benefits and services and see how it works for you. But ultimately, I would say that there is a significant misconception around what small business owners are. And we, more than anyone understand, not just the personal sacrifice that a business owner makes when they go out and put their necks on the line for it. But also what goes into that, the hours, not just operating your business, but that they are spending doing paperwork, filling out HR forms, tax forms. We know most small business owners don't have HR departments. They aren't themselves accountants.
Ryan Mallough: We are here to help. We are here to do everything we can to make sure that your business is successful and that you have a voice when it comes to what the government is doing that has an impact on your operations. And again, you may not think it when you're going in. Again, we want to make sure that you're focused on your operation, but business owners need a voice. It is important that government hears them, because if they don't, misconceptions just run amuck and they policies that hurt. We are the shield to protect against that and the sword to ensure that the government is putting small businesses first that they're thinking about the little guy when they're developing policy.
Jason Pereira: Fantastic. Thank you so much and keep up the good work.
Ryan Mallough: Thank you for having me.
Jason Pereira: And thank you for joining us today for The Wisdom of Wealth. And I hope you've learned a little bit about starting a business, and when you start a business, where to turn to for help. Because here, we always try to make sure you know when and where to go for help. As always, thank you.