Establishing Your Home Business
Establishing your home business involves the legal aspects of starting a business. You need to prove to the government and wholesale suppliers that you are an official business producing handcrafted items for sale and not just as a hobby.
To be Legal or Not -- That is the Question
Why should you be legal when you are finding that you are making very few sales, and cash going out of your hobby-business greatly exceeds the cash coming in, especially when you know that you could probably get away with making a little extra "money under the table"?
Once you are "in business", and not just producing crafts as a hobby you'll find you are entitled to a great many tax deductions. If you are just selling your hobby-crafts at local church bazaars at Christmas time or to friends and neighbors, the tax department may say that this "side-line" activity is merely a hobby and that you have no real intention of earning a profit.
If this is the case, you may not have to declare your income from your business, which is probably only a few hundred dollars at the most. However, you won't be able to deduct any expenses either. This means that you won't be able to deduct your craft show entry fees, automobile expenses, your workshop or studio in your home, and all the other expenses you have incurred against your income.
There are a number of things you can do to help convince Revenue Canada or the IRS that you are operating a business rather than a hobby. This would include keeping your personal and business affairs completely separate by opening a separate bank account for your business. Running your personal and business activities from one checkbook is a mistake that can cost you valuable business deductions. Not only does it create confusion at tax time, but your business has a credibility problem which, should there be a dispute, would not be easily overcome. To validate expenses related to your business keep careful records of all receipts and invoices, you need to back up all expenses with proper documentation.
Here are some other suggestions for demonstrating to the IRS or Revenue Canada that you really have a home business: have printed stationary and business cards that exhibits your company name and address, register your business name, purchase all business supplies by company cheque, prepare a written and comprehensive business plan, and so forth.
In order to be considered a business, an activity must be carried out with a "reasonable expectation" of earning a profit either right away or at some time in the future. In the early years of a business, it is quite likely that you will end up with a business loss, at least on paper, which can be used to offset income from salaries and other sources, and thus cut taxes. If recorded properly, these losses may be used to decrease taxes when the business is showing a profit in future years.
It makes no sense to establish a home business and then avoid acting like a legitimate business owner. In fact, your less-than-professional attitude can kill all of your chances for success. As well as benefiting from all the tax deductions to which a legitimate home business owner is entitled to, you may at some point want to expand your business and may possibly need to apply for a business loan, therefore, you will have to prove your credit worthiness and will want your gross income (and net profit) to be as high as possible. Keeping your business legal will do more than you can imagine to help your home craft business grow and prosper.
Registering Your Home Business Name
A sole proprietorship can be operated legally under your own name without registration, but if you want to adopt a distinctive or fictitious name for your business, (for example, Julie Smith carrying on a business as Precious Jules), or a name comprising your family name or surname with the addition of some other word or phrase indicating a number of members (for example, Smith and Company), you must register it and obtain a "DBA" (Doing Business As) certificate.
Many banks require such certificates before they will open an account in your business name.
Choosing a name for when establishing a home based business requires a careful, organized, and creative thought process. Names are like people, some will be remembered and some will not. Keep in mind that your name should work for you. Your goal in selecting a name should be to create the image you wish to convey, and to correctly position yourself in your market. The name you choose should be one to serve your needs, have memorability, unique character or identity, and most important be legally protected. For more detailed information on choosing a names see the following article: Naming Your Jewelry Business.
Once you have named your business and choose the type of business structure that is right for you, you are ready to register your business with the appropriate authorities. Thus, establishing a home based business.
The registration of your business name does not in itself ensure exclusive use of that name in the province where you registered it. The government has no obligation to avoid name duplication or to advise anyone registering a name that it has been previously registered.
You are responsible for ensuring that the name is not already in use. Upon request and for a fee, your provincial registry will check its files and provide the addresses for any duplicates that may exist.
Vendors Permit/Retail Sales Tax
Retail sales tax is merely a tax based on the retail selling price of most purchases of goods and on labor charges to install, repair and maintain taxable goods and equipment. For example, if you exhibit at a craft fair and sold some of your work to a customer, you would have to charge him or her a sales tax on top of the price of the product, which is a percentage of the total cost of the purchase.
Each province and state has its own rules with regard to retail sales tax. For example, in Ontario the retail sales tax is 8% on most consumer purchases, while in Alberta there is no provincial retail sales tax at all. In provinces and states that levy retail sales tax, businesses that sell goods must obtain a sales permit and are responsible for collecting tax from their customers and remitting it to the provincial government on a regular basis.
Your local retail sales tax district office will provide you with more information and also issue you (at no cost) a vendor's permit (also called a retail sales tax license) which is a certificate of authority to collect the tax, send you reporting forms and all necessary instructions, and advise you of dates (usually monthly) for remitting tax collected.
They will also send you a purchase exemption certificate, which exempts you from paying retail tax if you are buying goods for resale or raw materials that will be used in the final product that will be sold directly to the consumer. If you have a retail sales tax permit, you do not have to pay retail sales tax on materials bought for use in products you plan to resell. Most merchants will want you to fill out a purchase exemption certificate stating that the goods purchased are intended for use as a component part in an article for resale.
Many jewelry designers ignoring the sales tax law, sell their products at fairs without collecting a cent of tax. If you get caught without a retail sales tax permit you will most likely have your booth shut down, also note, that failure to collect sales tax and file returns could result in more than just having one's booth closed. It is also illegal to collect retail sales tax and keep it as income.
You must collect sales tax even if you are a hobbyist who only sells occasionally ("for the fun of it") and do not consider yourself to be "in business", the tax office is not concerned whether you are "in business" or not, but whether you are selling directly to consumers on a retail level. You must still apply for a temporary vendor's or sales tax permit and remit any tax collected, even if it is for a one-time event.
Even if you only sell your work at wholesale prices you should still apply for a retail sales tax permit. Although you do not need to collect sales tax on your wholesale or consignment sales to shops, galleries, etc., as mentioned above you will need a tax exemption certificate from the province or state in order to buy your raw materials at wholesale without paying sales tax. And, further, you should always be sure to obtain, for your tax files, the resale tax number of any retail shop or gallery with which you do business. Just as you the jewelry designer must furnish your resale tax number to suppliers when you are buying supplies for resale, so must your wholesale customers (shops, boutiques, etc.) furnish you with their tax-exempt number when they purchase finished crafts for resale.
Goods and Services Tax
What Is The GST?
The Goods and Services Tax (GST), introduced in January 1991, is a Canadian federal sales tax applied at every level of the economy (manufacture, wholesale, retail) and to all goods and services (with certain exceptions) every time a change of ownership occurs throughout the chain of production and distribution. The rate of tax for goods and services is 5%.
Who Must Register for GST?
All companies and individuals carrying on business even a home business in Canada, except "small suppliers", must register their businesses with the government to obtain a GST registration number and must quote that number when collecting the GST on the goods and services they sell.
If your sales of goods and services exceed $30,000 per annum then you have no option—you must register, and you must do so in the first quarter immediately after reaching your $30,000 limit.
If your annual gross revenues from taxable goods and services are under $30,000, you are considered a "small supplier" and have the option of to register or not. If you do not register, you do not charge GST on goods and services you provide to your customers. Also if you do not register you cannot claim or recover the GST you must pay on your business purchases and operating expenses.
The catch is that businesses that choose not to register will still have to pay the GST on all their purchases and operating expenses, but will not be entitled to refunds, so their costs for supplies and all other services necessary to operate will go up by 7%, because they will not be able to claim GST input credits. However they will not have to keep track of GST paid and will not have to collect and remit GST on sales.
The following two factors should be taken into consideration when deciding whether to register or not. If a jewelry designer's home business is:
- Supply intensive, i.e. the cost of supplies makes up a large part of the end price, then it may be beneficial to the craftsperson to register for the GST in order to get back input credits.
- Labor intensive, i.e. the cost of supplies is a minimal amount of the final price, it may be beneficial not to register, in order to save the bother of keeping track of the GST. In this case it is also important to consider whether gallery sales are a significant portion of the business. If they are, then the cost of paying GST on gallery commissions should also be taken into consideration.
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