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Starting a new business that is a franchise has all the steps and concerns that any new business has, plus some that are particular to franchises. Once the decision has been made to seek a franchise rather than buying or starting an independent business, a number of items need to be decided.
Although it might seem premature, you should consider hiring your accountant and lawyer before deciding on what business to open and when. Your professional advisers can provide guidance to you regarding a great many items. For instance, what return on investment can you expect from the franchise, what amount can you expect to pay in franchise fees, occupancy costs, payroll costs, income taxes, and other projected costs? Your accountant can assist you in setting up your accounting system, as well as guide you in refining your business plan, and assist you in applying for bank loans. Your lawyer can help you to understand your rights and obligations under the franchise agreement, and can help you set up your corporation if required.
The next steps involve the business structure and planning for the start up. Do you want to buy an existing franchise that is operating, or do you want to start up a brand new operation? There are advantages and disadvantages to each choice, which are different for different business sectors.
Buying an existing business means that you don’t have to go to all the work of locating business premises, making leasehold improvements, hiring and training staff, and all the myriad tasks involved in starting a business from scratch.
While this is quicker and may be easier, things are seldom cost free in business, this option is likely to be more expensive, or the furniture and fixtures may need repair or replacement, or other factors may end up costing more. You may be purchasing unrealized liabilities with the business, such as labor problems, a bad location, pending litigation or other problems such as environmental clean up costs.
The next decision is whether or not to incorporate – franchisors may require that franchisees be incorporated, and there are many advantages to incorporation – see sidebar. The disadvantage to incorporation is the cost and increased red tape.
The first and biggest advantage to incorporation is the low tax rates for active business corporations. The first $500,000 of active business income for corporations is taxed at a very low rate – between 13.5% in BC and 27% for Nova Scotia, with 8 Provinces and territories at 16% or lower. Contrast this with the income tax on business income of between 39% (Alberta) and 50% (Nova Scotia).
The next big advantage to the corporation is you may be able to claim Lifetime Capital Gains Exemption (LCGE), where the first $750,000 of capital gain on the shares may be exempt from income tax. If your franchise if successful and you sell it down the road, you and any other shareholders may benefit from the LCGE.
A corporation allows for much more sophisticated estate planning and tax planning, for instance income splitting with a spouse and other family members, and corporations also allow for efficient succession planning, because shares can be sold or transferred over time.
Corporations also offer limited liability for their owners, in that their risk is limited to their investment in the corporation. Although this sounds great, in practice, most lenders and the franchisor will normally require a personal guarantee, which invalidates the limited liability of the corporation. However, limited liability is still valuable to the shareholders for many other liabilities of the corporation.
Next you should determine what training you will have to complete before you can open your franchise. Training is available from most franchisors, along with systems and procedures to run the business, and some may have to be completed before your business opens the door.
Consider joining organizations like the chamber of commerce, Canadian Federation of Small Businesses, or industry groups, if you don’t already belong.
The next step is to register for GST/HST as soon as you decide what business structure you will have. You cannot claim input tax credits for GST/HST paid before registration, so it is important to register as soon as possible. If you are buying an existing business or their assets, you can avoid paying GST/HST on the assets, but only if both you and the vendor are registered for GST/HST.
You might as well do all your Canada Revenue Agency registrations at the same time and make sure that you are registered for your business number, GST/HST, payroll, import/export, or corporate taxation number.
Next is registration for WCB, your business license, your business bank account and business credit cards. If you are building or renovating business premises, or installing leasehold improvements, you will probably need building permits and or electrical permits.
What most people would consider the first steps towards starting a business, registering for GST/HST and getting a business license, are actually among the last things you need to do in the start up process. Most of the actual work of starting up a new business is the planning before business activities actually start.
JOYCE A. SMITH, C.G.A., C.F.P.
Managing Partner and Senior Service Provider
J.A. Smith & Associates Inc.
Joyce has been in public practice since 1967. For 17 years prior to starting her own practice, she was one of ten partners in an accounting firm serving mid-Vancouver Island, British Columbia. She has held a special interest and involvement in management consulting and establishment of performance measures for companies.
Joyce can be reached at 1-250-751-3383 or via email at firstname.lastname@example.org