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.
Return to Establishing Your Home Business
Return to Start a Home Jewelry Business
Return to Beading Design Jewelry home page.