I am often asked to discuss the start of a home-based business. Most provinces (hopefully including Ontario soon) allow real estate professionals to set up personal real estate corporations. But for other businesses, if you have a client who is thinking of operating a business from home, here are some things to consider.
The legal nature of a sole proprietorship
In this form of entity, you are starting a business on your own. You are not creating a corporation (which we will discuss later on). Instead you are acting on your own, and are referred to as a “sole proprietor”.
You can give the business a name such as Joe’s Shoe Store or Sally’s Gourmet Sandwich Shop. If you wish, you can register your business name. To do so in Ontario, you must file a form with the provincial Ministry of Consumer and Commercial Affairs for a minimal fee.
Registering a business name under this format does not give you any exclusive rights to that name; however, if the name you register violates a registered trademark of a third party, they may insist that you change your business name.
If you register a business name you can open a bank account, enter into contracts, send out accounts for services provided and/or for goods supplied under that name. If you do not register a business name, then any of these types of activities will be undertaken in your own personal name instead.
Zoning bylaws, apartment rules, condominium rules and bylaws
Whether you are a homeowner or a tenant, check your municipality’s zoning bylaws to see if they permit the use of your dwelling for these purposes. This is particularly important if you will have clients coming to your home to consult with you and/or to purchase goods. Zoning bylaws can also be specific in restricting activity. You may be permitted the use of the dwelling as a psychiatrist’s office, but not as a hair stylist’s salon.
If you are a tenant, you must also check your lease, which may prohibit you from carrying on a business from the premises you are renting. These issues are especially relevant if you are a tenant in an apartment building. Check your lease and the building’s rules and regulations.
If you reside in a condominium, whether as the owner or a tenant, in addition to checking zoning bylaws, you must also clarify whether the condominium’s declaration, bylaws and/or rules and regulations permit you to carry on any type of business from the condominium unit. For the most part, any business or service involving clients and customers coming to your unit in a condominium will be prohibited.
After registering the business name, one of the next steps is to open a business account with your financial institution. Make an appointment with an appropriate banking official ahead of time, rather than just walking into the branch without having an appointment.
GST/HST and provincial sales tax
If you are running a business, your obligation to pay HST is triggered once your business revenues, be they in the form of sales of goods, or billings for the provisions of services, exceeds $30,000 annually. At this point you are required to register for an HST number and charge, collect and remit GST/HST to the Canada Revenue Agency on a regular basis.
Depending on the nature of the goods you sell and the services you provide, you may be required to charge, collect and remit provincial sales taxes as well.
Just as an individual must report income to the CRA, any business must also report its income. As a sole proprietor your business income is simply reported on your personal income tax under the “business income”’ category. You must report all sales and services billed income from which you can deduct all related expenses.
In addition to specific business expenses such as equipment and machinery purchases, cost of materials, supplies and goods for resale (if applicable), you can claim phone expenses for a specific business phone, office supplies, automobile expenses solely related to business-related use and a maximum of 50 per cent of entertainment and meal expenses – again, solely for business purposes.
When your business is home-based you can claim a certain percentage of your home’s expenses as a business expense. The formula to determine what percentage of your home’s expenses can be claimed is generally based on the percentage that your office space takes up, relative to the total area of your home. Some of the expenses that can be claimed are:
- Mortgage interest (but not mortgage principal), if you own a dwelling;
- Rent, if your home, apartment or condominium unit is rented;
- Insurance on your dwelling;
- Property taxes;
- Maintenance and repairs;
- Phone if you use your own personal home phone number rather than a dedicated business phone line.
The other common form of business entity is a corporation. In Ontario, this is created by preparing and filing a Corporation Application with the Ministry of Consumer and Commercial Affairs.
A corporation is a legal separate entity, existing entirely apart from the individual person; it is the corporation that carries on the business, not the individual who incorporated the business.
This is the most significant difference between a sole proprietorship and a corporation.
Although the corporation is conceptually a separate entity, it requires the participation of humans to make decisions and get things done. This is achieved through the roles of a corporate director, president, secretary and treasurer. In a smaller, home-run business, you may serve all of these roles yourself; however, you are still not personally responsible for the corporation’s debts.
With that said, there are various instances where you may indeed be personally liable. For example, where:
- the corporation’s bank requires you as the incorporator to personally guarantee loans (also known as lines of credit) given to the corporation;
- a supplier insists that you personally guarantee payment for goods and/or services provided to the corporation; or
- the corporation owes taxes and you are called upon to pay them.
While I have only briefly discussed corporations, a number of proprietorship issues that I have commented on are also applicable to home-based corporate businesses.
The bottom line
In summary, if you decide to start up a home-based business, whether it’s a proprietorship or a corporation, there are many factors to consider and matters to be looked into and researched thoroughly.
I always recommend talking to:
- Your accountant (not a bookkeeper) for initial financial and business advice;
- Your lawyer for legal and business advice and assistance in creating the unity; and
- Your banker for financial advice.
I feel it is important to note that some accountants attempt to do what is actually a lawyer’s work. Their work and sphere of activity is distinctly different than that of a lawyer and should be dealt with accordingly.