Section 3: Structuring Your Business, The Outfitter's Manual - Nature and Outdoor Tourism Ontario

SECTION 3
STRUCTURING YOUR BUSINESS

“Life is too complicated not to be orderly.” - Martha Stewart

Planning and structuring your business is important for many different reasons. It is an essential part of ensuring that your business is complying with government regulations. Structuring your business will also help you manage your operation more efficiently, ensures that your business remains viable and will, hopefully, provide you with an income for your retirement years.

Basic business structure involves:

Company organization
Professional services
Keeping business records and tax planning
Retirement planning

1. COMPANY ORGANIZATION

In Ontario, there are three different ways to organize a business. It is best to talk to an accountant and a lawyer to determine on the right type of business organization for you. The three types of business organizations are as follows:

Sole Proprietorship

Sole proprietorship is an inexpensive way to start-up a business and gives you the most freedom from government regulations. A sole proprietor has complete control of the business and all of its profits. However, the sole proprietor is also personally liable for all of the debts and liabilities of the business. This liability extends beyond your investment in the business and will include your personal assets.

To create a business name you need to file the name under the Business Names Act within 60 days. For more information about registering your business name go to:
http://www.ontario.ca/en/services_for_business/STEL02_039990
Partnership and Limited Partnership

A partnership is a type of business organization where two or more people combine their resources to make a profit. To protect the partners a partnership agreement needs to be drawn up by a lawyer. The agreement should outline: the nature of the business, amount of capital contributions, division of profits and losses, rights and obligations of each partner, and procedures for termination of partnership.

In a general partnership, all partners are entitled to participate in ownership and management of the operation. Each partner assumes unlimited liability for the debts of the partnership.

In a limited partnership, the partners are only liable for the amount of money that they brought to the business. There must be at least one managing partner in a limited partnership. This managing partner has unlimited liability. Needless to say, trust is an essential component in this type of business organization!
Corporation

A corporation is a legal entity, separate from the persons who own it. The owners become shareholders of the business. Each shareholder has limited liability. A corporation is more highly regulated than the other forms of business organizations. It is subject to general laws regarding contracts, holding and transferring property, tax payment and criminal law.

A company may be incorporated at a federal or provincial level. Any corporation operating in Ontario is subject to the general laws of Ontario. Most tourism operations, if incorporated, are privately held. There are strict restrictions in place regarding stock ownership and stock transfer. The control of the company remains in the hands of a few designated people.

To set up a corporation you will require the services of a lawyer. Corporations are also required to file an annual report. The main advantage of this type of business organization is the appeal of limited liability. Only assets held by the corporation are liable in the case of business failure.

For more information about corporations go to:

http://www.cra-arc.gc.ca/tx/bsnss/tpcs/crprtns/menu-eng.html

2. PROFESSIONAL SERVICES

As a business person, you will need to use the services of business professionals from time to time. Professionals can help you with your initial business purchase or help you create a new business. They can guide you through long term planning and budgeting and they can maximize your everyday business operations.

There will be times when you will require the services of a professional but, in the long run, the more familiar that you are with the legalities of running a business, the more you can do on your own.

The following lists the types of professionals and the services that they provide:

Real Estate Agent

A real estate agent or broker will represent your best interests if you decide to purchase a tourism operation. The agent or broker is familiar with the Real Estate laws in Ontario regarding the sale and purchase of an operating business. They can also provide you with financial information and asset options on purchase. It is normally the responsibility of the real estate broker to draft the offer to purchase for the buyer. The broker can arrange with meetings with financial lenders and develop business plans for financing the purchase. Real estate agents or brokers that deal specifically with tourism operations can provide you with invaluable advice about all aspects of a property.
Lawyer

A lawyer can provide you with a range of legal services pertaining to your business and personal life. If you purchase a tourism business you will require legal advice regarding property purchase arrangements. You will also require input on legal protection when setting up your business. A lawyer can advise you on your business organization, business management, and counsel you on insurance issues.
Accountant

An accountant will provide you with sound, long term financial advice. Accountants are familiar with corporate planning, tax planning, and retirement planning. They can help you to create and implement your business management plans. An accountant can also advise you on which expenses can be charged to your operation.
Engineer

There are different types of engineers. Depending on your needs, you may require the services of a Civil engineer, for such things as structural design, road work and construction. An Environmental engineer can provide advice pertaining to water, sewage and fuel tank issues.
Building Inspector (commercial)

It is vital that the buyer of a commercial tourist establishment seek the services of an inspector (who may also be a civil engineer) and familiar with the climate and conditions of the north country to carry out an visual inspection of all buildings and structures (docks, ramps, roadways, shoreline) being purchased. This person also is usually quite expert in noting the conditions of the plumbing, heating, electrical services, water/sewage systems, and by preparing a written report will note the condition/ state of repair of everything, point out immediate concerns, and even suggest estimated costs and personnel who might do the work. The buyer will ask the vendor for approval to bring the inspector on-site. The cost of emergency (health or safety) remedial work is a tool in negotiating the final sale price.
Graphic Designer

A graphic designer or an advertising firm should be employed to create your logo, signage and marketing material.

Professionals usually charge by the hour or by the job. Make sure that you set a fixed fee in advance and plan a maximum price for the work before it starts.

To find a suitable professional, one that knows the tourism business, talk to other people in the industry, friends, or your tourism association. There are plenty of professional firms in business so make sure that you trust and are comfortable with the people that you do hire.

3. KEEPING BUSINESS RECORDS AND TAX PLANNING

Maintaining proper and complete accounting records is your legal responsibility under the Income Tax Act. Your operation’s books and records may be audited at any time by federal and provincial agencies. For more details on how to set up proper records go to the Financial Management section.

Developing a tax plan requires that you organize your business so that you minimize the taxes that you pay. There are two kinds of tax that you will have to pay - business and personal tax. The amount of taxes that you pay will vary depending on how your business is organized. It is imperative that you seek professional help with both your business organization and your tax planning. Each operation and each personal situation is unique and requires a unique setup to best suit your personal requirements.

4. RETIREMENT PLANNING

Retirement planning should begin at the same time that you set up and go into business. Discuss retirement planning with your accountant and financial advisor as part of your business plan. Saving for retirement should be an on going process. Some of the more traditional ways of saving and planning are as follows:

Registered Retirement Savings Plan (RRSP)

The RRSP is the most common form of retirement savings. You can contribute to an RRSP on monthly basis or with a yearly lump sum. Your RRSP can be self directed or handled through a financial organization. Either way, your investment is earning interest and you reduce your payable income tax every year that you make a contribution.

Your money will be taxed once you take it out of the RRSP. However, your total earnings during retirement should be much less than when you were running your business and, theoretically, you should be paying less tax.
Registered Pension Plan (RPP)

A RPP is a pension plan where contributions are made by the business on behalf of the owner. They are tax-deductible by the business and collect interest, untaxed, until the owner withdraws them upon retirement. The contributions made by the business must be taken as a life annuity. Any personal contributions can be taken as an RRSP.

This type of pension plan works best when a business is incorporated and any shareholder or employee can participate in the plan. This type of pension plan reduces both business and personal tax.
Capital Gains Exemption Planning

Many business owners only plan for retirement by having a “nest egg” waiting for them on the sale of their operation. This is not the best type of retirement planning. You need to incorporate some of the other pension plans to guarantee a financially safe retirement. Many things change over the years and it may be difficult to sell your operation down the road for what you believe it is worth.

The good news is, when you do sell your operation, there is a lifetime capital gains exemption of $500,000 for the business owner. A spouse or family member owning shares can also qualify for additional $500,000 exemption. Depending on your situation, you can trigger all or a portion of your capital gains without selling.

Retirement planning is a complicated process. Make sure that you talk to your accountant to determine what is best for you and your particular situation.