For those just dabbling let me be clear, if you are selling anything at all you are a business. Registering your business is important because it gives you a Master Business License. This license is an critical tool for your success. First, with that Master Business License you can now buy wholesale supplies. Second, you have a piece of paper that says you are truly in business. One of my Steps to Success is to take your business seriously. Put that piece of paper on a bulletin board where you can see it whenever you are working. If you don’t take your business seriously, why would anyone else?
The steps to registering your business are:
1. decide on your legal structure
2. choose your business name
3. do a name search
4. register your business
In Canada there are three forms of ownership to consider:
1. Sole proprietorship
A sole proprietorship is an unincorporated business that is owned by one person. It’s the simplest kind of business structure. The owner of a sole proprietorship makes all the decisions, receives all the profits, claims all the losses, and does not have separate legal status from the business.
Sole proprietors are fully responsible for all debts and obligations related to their business. A creditor with a claim against a sole proprietor would normally have a right against all business and personal assets, meaning the creditor could seize some of your personal belongings. This is known as unlimited liability.
If you’re a sole proprietor, you pay personal income tax on all revenue generated by your business. This income is reported on your regular tax return – a T1. You may also deduct business expenses on the same tax return.
A partnership is an association or relationship between two or more individuals, corporations, trusts, or partnerships that join together to carry on a trade or business. Each partner contributes money, labour, property, or skills to the partnership. In return, each partner is entitled to a share of the profits or losses. The business profits (or losses) are usually divided among the partners based on the partnership agreement.
Forming a partnership is as simple as turning to your friend/partner/sibling and saying, “Let’s be partners.” While a verbal agreement is all you technically need, I highly recommend that you have a written agreement drawn up, preferably by a lawyer. Should you and your partner have an acrimonious split, and your partner runs up a huge debt and leaves, you are responsible for the debt. The advantage of a legal agreement is that it can limit your liability. A written partnership agreement should set out the terms of dissolution in case one of the partners decides to pull out. The other advantage of a written agreement is that it forces you to plan each partner’s responsibilities and duties. Any time spent planning or considering how your business will work is worthwhile.
A corporation is a separate legal entity. It can enter into contracts and own property in its own name, separately and distinctly from its owners. If you incorporate your business, then you are an employee of the corporation.
There are many advantages to a corporation. The main advantage is the limited liability of the incorporated company. Unlike the sole proprietorship, where the business owner assumes all the liability of the company, when a business becomes incorporated, an individual shareholder's liability is limited to the amount that he or she has invested in the company. The other advantage is that corporations pay a lower tax rate. As you are an employee of the corporation, you are only taxed on your salary.
Many businesses start as sole proprietorships and later become incorporated as their growth warrants. A sole proprietorship regularly earning in excess of $50,000 of taxable income annually should think about incorporating. (Taxable income is income after expenses.) Talk to your accountant to see if incorporation makes financial sense for you.
Partnerships and corporations must register their businesses. Sole proprietors do not automatically need to register their businesses. If you are keeping your business very small and operating under your own name then you do not have to register your name. However, if you are a sole proprietor and choose not to register you may legally only operate under your own name with no additions. For example, if I want to run my business under the name “Catherine Winter”, I don’t have to register my business name. I can’t add any descriptors such as “Catherine Winter Jewelry” or “Catherine’s Crafts”. The moment you add anything to the name you must register. (The exception to this is Newfoundland and Labrador, in that province, you do not have to register the name of sole proprietorships or partnerships at all.)
Choose your Business Name
Often your business name is the first impression people have of your work. When choosing your name, I recommend using a unique word or phrase that captures the spirit of your work, or using all or part of your name.
Whatever name you choose, just be sure it won’t limit your business potential. Your style and products will change dramatically during your first couple of years in business. Imagine someone who makes earrings and opens a business called Mary’s Earrings. Great name for now, but what happens if Mary adds bracelets to her collection?
Here’s a couple of tips about names. If you opt for a name such as Mary Smith Designs, then somewhere on your business card or other promotional material, you must list your craft. Designs is too vague, you might be doing gardens or quilts. If someone found your business card on the street, would they know what you do?
Do remember that we are a multi-cultural country and many of your customers are not native English speakers (especially if you are selling online). Don’t pick a name that is difficult to pronounce or has some nasty meaning in another language. (Plug your name in to Google and see what comes up).
What’s trendy right now won’t always be so. Does your name have the staying power for a couple of years?
Your business name should be:
- Unique – make your name stand out from those of other similar businesses.
- Descriptive – a customer should know what you do
- Simple – don’t make your name too long
- Easy to recall – one or two words or initials make it easier for your customers to remember you
- A good fit – it must fit in with your business image
- Legal. Not only are you choosing a name that will bring in oodles of customers, you must also choose a name that is satisfactory to the government. You cannot use a name that implies any association with any branch of government. Your name must be in the Roman language. You can’t use words that imply incorporation; and the list goes on. For a full list of what you can and can’t use go to Registering Your Business Name in Ontario (scroll down to the “Restrictions on Business Names” section)
Do a name search
Next it is a good idea to do a search for your chosen business name to see if it’s in use. Business name registration is no guarantee of exclusivity. (Business name protection is provided by a trademark, not by name registration.) Trademarks take between 4 and 24 months. The Business Names Act doesn't prohibit the registration of identical names, so you could register a business name that another company is already using. If you do, or if you register a name that's confusingly similar, a lawsuit could result so it's a good idea to conduct a name search to see if anyone else is using the business name you want.
There are several different search options you may wish to pursue. Each name search will cost you $8 to $12, depending on where and how you conduct the search.
Searching the business names public record at the Companies Branch (located on the second floor at 375 University Avenue in Toronto) will tell you if someone is already using the business name you have selected and where that business is located, although it will not show variations of business names or corporation names. You can also browse through the Electronic Corporate Index while you're at the Companies Branch, or request a corporate search.
You can also search online through OnCorp Direct Inc. or Cyberbahn Inc.; both of these corporations are Primary Service Providers under contract with the Ministry of Consumer and Business Services.
You may also want to get a NUANS report. NUANS (New Upgraded Automated Name Search) is a Canada-wide corporate and business name registry. A NUANS search will display corporations, business names and trademarks which are similar to the name you have searched. To search NUANS, you will need to contact a private service provider (listed in the Yellow Pages under "Searchers of Records") as the Companies Branch does not provide these.
Whether or not you choose to do a name search you should definitely do some online research. Plug your name into Google or another search engine. If there is another company with a name close to yours check out their online presence. If you want Mary Smith Designs (you make jewelry) and there’s a Mary Smith Designs (landscaping) but they’re in a town 1,000 kms away it probably isn’t an issue.
Now that you've decided on your legal structure, chosen your business name and conducted a name search (if necessary), you're ready to go through the actual business registration procedure to register your sole proprietorship or partnership. Next week, we’ll walk through the registration process (it’s easy-peasy).