Author Archives: Kaitlin Kirk

The Burden of Incorporation

You have this amazing idea, you know you can help people, and you’re sick of your 9-5 job – so you make the choice to start your own business. It’s scary, but SO liberating.

Great! You’ve decided! You’re doing it! Yay!

Now what?

Should you incorporate? It would feel so official to incorporate. You’d have a real piece of paper saying you owned a company! You could take a selfie with it to keep as a record of this exciting new chapter in your life!

Let’s slow down. I totally understand this feeling. When I started my business, I wanted everyone to know. I was SO excited to go on an adventure and leave my old life behind.

An Incredible Journey

On your journey, you need the right tools. Think of your business form like a backpack. You want your pack to be the right size and weight for the adventure you’re on, so it doesn’t slow you down, but has everything you need in it.

If you’ve headed out for a day trip, maybe a small backpack that can hold your lunch and a couple water bottles is all you need. It would be nice and light, but would have everything you needed for the day.

What if you wanted to go on a multi-day trek up the side of a mountain? You’d want to have a big camping pack with a tent, a sleeping bag, a change of clothes, and a bunch of food and water.

Now think about having that big camping pack on your day trip. It would take far more energy to haul that pack around than the small backpack with just your lunch.

Business forms are the same. Think of the camping bag as a corporation. There are times when you absolutely want to have a big, heavy corporation for your business, but if the benefits of having all that structure is less than the weight of it, don’t incorporate.

There are a number of considerations when you’re deciding whether or not to incorporate your business, here are my top five:

Risk

A corporation is a distinct legal entity separated from you as a person. This arms-length distance can be especially important if you are working in an industry that is exposed to risk.

In the unfortunate event that your company is sued the assets of the company are at risk, but the lawsuit would not be able to touch your personal assets. At least in theory… in practice it is not uncommon for the business owner to also be personally named in a legal claim. (if you are concerned about your business liability, you should be consulting a lawyer to have this discussion)

Start-up Cash

If you need a bunch of money for start-up costs, a corporation will allow you to sell equity (shares) in the company or to take on debt to generate the funds you need. Except that a new corporation has the about same credit rating as a teenager who just moved out, so loans can be a challenge.

As a sole proprietor, you’re limited to your savings or the amount someone (like a bank or your Grandma) is willing to lend you.

Transferability

Are you in business for life, or planning to make fast money and a quick exit?

A sole proprietorship isn’t transferable. Somebody can buy your individual assets (like your equipment, website code, and rights to your trade name), but the business itself can’t be separated from the owner.

A corporation has shares, and shares can be transferred. It’s by selling shares that you’re able to sell a corporation
and everything that goes along with it. You can sell the assets of a company, but then you’re left with shares of a company with no assets, so that’s a whole other conversation.

Paying Yourself

As a sole-proprietor all your business income IS your personal income. Technically, there is no dividing line. (Though, for the sake of your sanity and success, I really recommend keeping very separate records for yourself and the business)

Your personal taxes and bookkeeping will become much more complicated than you may be used to as an employee.

When you incorporate, the tricky part is then actually paying yourself for your work. As an individual you’re taxed on any money you pull out of the corporation. That means for the corporation to be worth it, the total amount of taxes paid by yourself and the corporation needs to be less than if you paid tax on all of the income personally.

A corporation is a separate legal entity from yourself, which means you need to file a separate tax return. These are not easy returns, even if the company didn’t do much in the year. You’re going to need an accountant to prepare the taxes, and it won’t be cheap.

There are a few tax planning opportunities with a corporation, but if you’re not making a certain level of income, it doesn’t matter.

Flexibility

It’s a paperwork-intensive process to incorporate a company and it takes a little while. You have to file annual reports whether or not the corporation had any business activity. It also must be closed (which means still more paperwork) if you ever wanted to quit.

A sole proprietor on the other hand, can just start doing business (make sure you have the proper licenses) and can stop whenever they want to. There’s a lot more flexibility there, so if life gets in the way, no big deal!

My general recommendation is to start out as a sole proprietor and only incorporate when it becomes beneficial for you. This article is by no means an exhaustive list of reasons for or against incorporation. If you’d like to chat more about this, I’d be happy to help you out https://www.kirkcpa.ca/contact

When you start out on a business adventure, just grab the small backpack that’s already in your closet and head out the door. While you’re out, if you decide to take on a much longer and more complex adventure, you can always go by the camping store get yourself a bigger backpack with everything you need in it.

Kaitlin

P.S. If you’re on a business adventure come join us in the Captains Harbour community! We’re business captains that have come together to chat and get support on all things accounting and taxes!

Shoes Boxes Are For Shoes, Not Receipts

My mouth dropped open as I took the bin full of page protectors, grocery bags, and some other unidentifiable container all overflowing with receipts.

It was early in my career and I couldn’t believe this was for real.

Was I being punked? Was that an actual shoe box?

Yes it was, and no I wasn’t.

I have since learned it’s actually really easy to squirrel away receipts and end up with a pile of them to deal with all at once, or worse, not keep them at all.

Confession time. I’ve been that small business owner.

Sorting through receipts is time consuming and tedious, and not how you want to spend your time. Nor is it how you want your bookkeeper or accountant spending their time, because either way, you’re paying for it.

That goes double if there’s a fast approaching deadline looming over you.

Receipts are SO inconvenient. We always have to do something with them at the most inopportune time. Like at the gas station for example, you’ve just finished pumping your gas, you grab your receipt and get in the car to drive away.

Now it’s in your hand and you have to do something with it, but you only have about 2 seconds because the person behind you is impatient, so it goes in your pocket/wallet/purse/glovebox/anywhere you can stuff it… and there it stays, for months.

Believe it or not, stuffing our receipts into the nearest receptacle isn’t the issue. It’s not having pre-determined receptacle to collect them, and then not sorting them regularly, that’s the issue.

That’s how we end up with a pile of them to deal with, and potentially missing ones when we realize it’s tax time and those little bits of paper are suddenly SO IMPORTANT.

So how do we solve this problem?

My first step (now) when I get a receipt is to take a picture of it. It takes two seconds and now that little piece of paper can go in the recycling.

Pro tip: this only works if you get a receipt (obviously) so remember to ask for a receipt for everything.

What you bought, the date and the amount need to be clearly stated on the receipt. So if you go out for lunch, the debt machine receipt isn’t enough, you need the itemized one too.

That’s step one – take a picture.

Step two is to create folders in my cloud (or is it on my cloud?) for the year and then subfolders for the category my receipts belong in. For the gas receipt I would have a folder in 2019 called Vehicle Expenses.

I give them a naming convention that makes sense and tells me what I need to know. Because I use a bookkeeping software that pulls my bank transactions automatically, I don’t need to enter the receipt manually. I name the file based on where I was, the way I paid for it and the date if my phone/computer isn’t very good at date stamps. The gas receipt might be Esso-Visa 2405-March 14.

If it was a meal with a meeting, I’d probably add the name of the person I met with as well. I could then match it up with my calendar to prove I did in fact have a business meeting and not just lunch with my friend.

That’s honestly all you need. No more paper receipts! Win!

Pro tip: if you hate paper receipts as much as I do, it’s kinda therapeutic to tear them to shreds before they get recycled.

If you have a bookkeeper that you give your receipts to, you can give them access to your cloud folder, and they’ll have everything they need.
No more collecting boxes of receipts to hand over! Win-win!

If you know you’re not very good at taking pictures when you get receipts, make sure you put them in the same place every time, and block out 30 minutes in your calendar once a week to take pictures.

What about electronic receipts, like the ones you get emailed to you? Save those to your cloud folders too. Everything can and should go in there, so if the Canada Revenue Agency ever asked to see your receipts, you’d have everything ready to upload to them – without any panic or stress.

All. The. Wins.

Kaitlin

Why Hiring a Bookkeeper Might be the Wrong Choice for Your Business

When I tell a small business owner I believe they should do their own bookkeeping, I almost always get the same look. It’s a mix of terror and wide eyeballs that say “you’re f***in’ with me right?”

I’m serious though. Doing your own bookkeeping gets you elbow deep into the details of your financial information. You look at every little thing you spent money on, which forces you to think about your expenses in a head space that’s disconnected from the usual emotional high of buying something.

You have a chance to think about why you purchased it in the first place and, with objective hindsight, examine if you maybe should’ve left it on the store shelf. This assumes you’re bookkeeping in a calm and collected head-space. I understand this may not be the case right now. It may be closer to a fear and frustration tornado that’s raining overwhelm (I’ll come back to this).

As you review your expenditures you can catch errors before they become an issue. If you’re looking at your phone bills every month, and one month it goes up by $25, you’ll have a chance to call the phone company in that month to find out what happened. If it was all on auto-billing, it may have gone unnoticed and unquestioned.

Get ready to dig into your numbers! #elbowdeep

Let’s get ready to dig in to your business numbers. #elbowdeep

Doing your own bookkeeping also gives you an expectation for what your income statement should look like. If you know you’ve made the choice to put apps and other software in to Office Expenses, you can look at your income statement and know exactly what’s in the Office Expenses bucket (or line or account or category – whatever you want to call it).

If you outsource this job maybe the bookkeeper decides those items should go into Software Expenses, and only physical office expenses should go into Office Expenses. Now you’re looking at your income statement and you’re not really sure what makes up those amounts.

Your income statement is useless if you’re not sure what makes up the numbers.

How can you lower run-away utility bills if you’re not sure what’s classified as Utilities Expenses? Maybe you turn your heat off and shiver through the winter, trying to lower that expense, only to find out your phone bill was in there too, and the biggest cost was you kept going over your data limit – no amount of shivering will fix that.

Back to the Fear and Frustration Tornado

I understand the idea of doing your own bookkeeping is scary and not something you want to do, and I’m not suggesting you go it alone.

It’s important to have someone walk you through the basics of bookkeeping and receipt management, so you can setup a specific process that’s tailored to you and your business.

Think of it like hiring a bookkeeper as a coach instead of doing it for you. You’ll want to have a few lessons in the beginning to make sure you get started on the right foot (or left, if you’re left footed).

This person should be someone who creates a safe space for you to make mistakes and be honest about how the process is going. The more you can share with this person, the faster you’ll learn and grow.

As you gain confidence in your ability to sort, categorize and reconcile transactions, a lot of the negative emotions will start to ease.

Even the best dogs can get themselves into a mess. #gooddog

We tend to fear bookkeeping because we don’t know where to start, it’s difficult to understand whatever we can find on the internet (or know if we can trust it), and we worry that any mistake will have the Canada Revenue Agency (CRA) banging on our door.

The first two can be helped with a good bookkeeping coach.

The third? The CRA has a bad reputation for being mean and unyielding, and I don’t believe that’s totally accurate. I’m not here to advocate for them, but what I will say is this. You can always call and speak to an agent, who will explain the rules and how to correct whatever happened – you don’t need to be perfect.

No matter how big the mess feels, it can always be cleaned-up.

When’s the Right Time to Hire a Bookkeeper?

I don’t believe you should do your own bookkeeping forever. In fact you probably shouldn’t do it for very long. So how do you know when to hand it off?

1) Start by keeping track of the hours you’re spending on your bookkeeping. In the beginning it will be higher, but once you get the hang of it and it becomes part of your regular routine, you’ll have a pretty good idea of what it takes for you to do it consistently.

When the amount you would be making by doing something else exceeds the amount you would pay a bookkeeper, it might be time to hand it off.

2) If your bookkeeping starts to become more complicated, and you’re asking more and more questions, it’s probably time to hand it off.

3) When you have the available resources to comfortably pay a bookkeeper, it’s definitely time to hand it off.

If you’re still not sure, talk to your bookkeeping coach. They’ll have a good understanding of your specific situation and will be able to advise you based on your needs.

When you do hire a bookkeeper, you’ll get far more out of the relationship because you have experience doing your own books. You’ll have an expectation for your income statement and will be able to ask your bookkeeper why your numbers are changing.

When your numbers are changing, it gives you questions to ask about operations, and that’s where the real value lies. What are the business reasons for the change?

All your financial reporting, be it monthly statements or year-end analysis, can tell you everything you need to know about the health and status of your business, but they are written in a different language. The language spoken by accountants and bookkeepers.

Immersing yourself into the process of making those reports in the early stages will help you learn the language and understand the story behind the numbers.

Kaitlin