Many people dream of one day running their own business. The freedom and flexibility of being self-employed are very enticing, but it can be difficult to know where to start when creating a company. Between funding, planning, and execution, starting a small business can feel a bit overwhelming!
Today, our team at Group Enroll provides this handy guide on how to start a small business in Canada. We cover each step of the process, from initial planning to pursuing growth and expansion.
Table of Contents
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Think of a Business Idea
No matter where you are, the first part of starting a company is finding a good business idea. When contemplating an idea, you need to determine two core things: (1) what product/service will you provide, and (2) who will be your target audience or market?
More specifically, think of a specific problem and how your business could solve it. The marketability of a business depends on whether its main service or product fills a need. Successful businesses figure out their niches early and then cultivate their brand identity from there.
You don’t necessarily have to start a business in a field in which you have experience, but it can make things much easier. Many people transition from employees to business owners in a certain industry because they learn the relevant skills and inner workings of the industry.
Consider sitting down and writing out the skills and experience you have. From there, you can work on translating those skills and that experience into a product or service that fulfills some need.
Create a Plan
After figuring out a good idea, you need to draw up a viable business plan. Lots of people think they can just wing it, but they usually find themselves sorely mistaken. Starting a business requires a substantial amount of long-term planning and organizational skill. You need to account for every business expense and income stream.
Typical business plans consist of the following sections:
- Summary. The executive summary is a quick primer on your company’s purpose and your basic mission statement. Summaries also include information about founders, locations, and high-level financial information.
- Description. This section should contain a detailed write-up about your company—specifically, what service you provide and what your target audience is. The main point of the description is to get investors to see the value of your venture in the Canadian market. We’ve created a publication specifically geared towards attracting new investors. You can read that here.
- Market Analysis. Market analysis consists of an overview of your target market, including audience demographics and competitor activity. The point of a market analysis is to look at things other successful companies are doing and see how you can differentiate yourself from them while still tapping into your target audience.
- Organizational Structure. Organizational structure includes information about the basic structure of your company—i.e., who runs it, the legal structure, and the hierarchical structure. Consider adding information about key employees and their skills or experience.
- Marketing Strategy. No business is complete without marketing. Your marketing strategy should describe how you intend to reach your target demographic and grow your audience. Part of the marketing strategy should describe and explain the typical sales journey for a customer or client.
- Financial Projections. Financial projections are extremely important if you plan to attract investors. Investors want to know that your business has the potential to give them a good return. A solid financial prospectus should project at least five years into the future and outline things like expected income, expenses, cash flow, and future growth. The more detailed the projections, the greater the investor confidence will be.
- Funding Requests. Last but not least are funding requests. Funding requests outline the necessary capital you’ll need to fund your business over the next five years. The request should include a detailed breakdown of how you intend to use any investor funds for growth.
- Appendix. You can also add an appendix at the end that contains relevant charts and data related to market research and financial projections. The appendix can also contain additional information about patents, trademarks, and copyrights.
Determine Business Structure
Designing the appropriate business structure is crucial because it determines the company’s long-term growth. Your business’s legal structure affects several factors, from Canadian tax payments for small businesses to adding investors. Your business structure will also affect how debt and bankruptcy filings work.
The Canadian government allows for three business structures, each with different tax and liability implications.
A sole proprietorship is the simplest business structure and the most common among Canadian entrepreneurs. Under a sole proprietorship, the business and the individual are the same. Sole proprietorships don’t require any special registration like a corporation or partnership, so they are straightforward from the start.
The main downside of this structure is that it does not separate personal and business liability. Under a sole proprietorship, the owner is personally responsible for all debt the business incurs, meaning that creditors can come after personal finances.
Partnerships are essentially the same as sole proprietorships, except there are two or more operators instead of one. Partnerships don’t require any legal structure, though most partners have separate contracts that govern revenue shares and responsibilities.
Like sole proprietorships, partnerships are easy to form and allow for a lot of flexibility in business operations and organization. The downsides are the same as sole proprietorships—each partner is personally liable for debts, even those of other partners. This means that if one partner drops out, the others take on their debt and financial obligations.
The key feature of a corporation is that incorporation creates a legal entity separate from the owners and founders. Since a corporation is a legally distinct entity, it has different tax requirements and liabilities. Corporate debt is separate from personal debt, so owners are not personally reliable for business finances.
A corporation is an ideal organization because it provides more tax benefits and legal protections than sole proprietorships and partnerships. The main downsides are the legal and administrative costs of establishing and maintaining a corporate entity. Corporate entities also have different business insurance requirements.
Select a Name
Many people underestimate the importance of choosing the right business name. Business names are the first exposure to your brand customers will have and are the thing that will stick in their minds the most as they encounter your marketing materials. The business name should be memorable and accurately communicate your core values.
Your business name needs to be sufficiently unique so that you do not infringe on the name of another, already existing business. If you are a sole proprietor, you can operate under your personal name. However, corporations need to choose a name with a .ltd designation to signify their corporate organization.
Below are some tips on picking the right business name.
- Choose a name that is SEO-friendly so people can search for it online.
- Avoid hard-to-spell names because they can make it harder for people to search for your business.
- Pick a name that allows for future growth—e.g., don’t name your business after a specific city if you want national-level reach.
- Purchase the .com domain for your name or one that is sufficiently close. While you can use other domains, such as .net or .org, most people trust organizations with a .com address.
- Do a trademark search to ensure that no one else is using the same name and to see if you can get a trademark for your name.
- Get feedback from advisors, friends, and mentors. An outside perspective can identify potential issues with a particular name and whether it has staying power.
Register Your Business
Once you have decided on a name and your business’s legal structure, you will need to register it with the provincial authority. You may have to acquire specific licenses and permits before you can register your business. Sole proprietorships and partnerships typically have fewer registration requirements than corporations.
In addition to registration, you will also need a CRA identification number for tax purposes. You can apply for a CRA business number online or by phone. It will take about five days for the CRA to assign your business a unique 9-digit identification code.
The costs for registration depend on the business structure. For sole proprietorships and partnerships, registration costs depend on the province. For example, the fee to register in Ontario is around $80.
Corporations can incorporate at both federal and provincial levels. Federal incorporation usually costs about $250, while provincial incorporation costs depend on the province. For instance, the incorporation fee in Ontario is $300.
Open a Business Bank Account
One of the major perks of incorporating is you keep your personal and business finances (and obligations) separate. Even if you are not a corporation, having a separate business banking account is a good idea for accurate accounting and tracking cash flow.
Most banks offer business accounts that have the same features as personal accounts with additional perks. For example, some banks allow unlimited credit and debit transactions with business accounts. Some banks might have no minimum balance requirements or higher overdraft limits.
You should also consider applying for a business credit card. You can get a separate line of credit just for business expenses. Business credit cards usually have higher limits than personal credit cards and are ideal for routine corporate purchases, like transportation, meals, and supplies.
Arguably, the most important step of how to start a business is securing funding. Businesses have a high upfront cost, and unless you are independently wealthy and can fund the operation, you will need to either take out a business loan or accept funding from investors.
Fortunately, the Canadian government offers small business loans and grants, with special options for First Nations-owned businesses and veterans. Federal government loans often have more favourable terms than bank business loans, though they may restrict how you can use the funding. A small business loan from a bank might offer more flexibility but higher rates.
Finding private investors is a bit trickier. You’ll need to network to find willing investors, or you can use crowdfunding platforms. Private investors can provide significant funding, but most investors will want a portion of company ownership or profits in return. It’s crucial that you don’t give away too much ownership of your business before you get established.
Canadian Small Business FAQ
Below are some of the most common questions we receive about how to start a small business in Canada.
Taxation depends on your business structure. Sole proprietorships and partnerships must report business income on income taxes as well as the value of business assets. Corporations must fill out the T2 Corporation Tax Income Return. Your business may also be required to pay a Goods and Service Tax (GST) or Harmonized Sales Tax (HST).
Yes, you can change the legal structure of your business from sole proprietorship/partnership to corporation. To change your business structure, you need to contact your local incorporating authority and report any structural changes to the CRA. The CRA will issue a new business number. You will need to notify them to add previous program accounts to the new business number.
No, there is no legal requirement to trademark your business name when registering either with the federal government or province. However, trademarking your business name is a good idea because it grants you additional entitlements and protections nationwide. You have exclusive rights to trademarked name usage, and you get additional legal protections for trademark infringement.
The best structure for a small business depends on your business size and income. Sole proprietorships and partnerships are a good arrangement for freelancers and low-risk businesses that do not generate substantial income. However, a corporate organization is ideal for larger operations that produce substantial revenue.