A Comprehensive Step-by-Step Guide on Establishing a Canadian Business

What kind of business are you aiming to establish?

Before you begin investing in the establishment of your company, it is vital to ensure that your business concept has the potential to thrive and succeed. The world is highly competitive, so taking the time to conduct research on your idea will yield tremendous rewards in the future.

Begin with market analysis

To discover a profitable niche, it is essential to conduct initial market research in order to identify your target customers and comprehend their wants and needs. Familiarizing yourself with the competition and identifying market gaps that your company can fill is equally important.

Your objective is to find the perfect alignment of your product with the market demands, where you attract customers and convert their satisfaction into loyal advocacy for your business. The Small Business Hub provided by Statistics Canada offers research resources that can aid existing and aspiring entrepreneurs in the planning and operation of their enterprises.

Consider financing and seek out mentors

This is also the stage to begin contemplating where you will secure the necessary funds to start and sustain your business. There are now more possibilities than ever before, but it is crucial to select an option that aligns with your ambitions. This article contains further information on financing your company.

To assist you with these tasks and other aspects of launching your company, it is highly advisable to seek guidance from a mentor with extensive business experience. If you are between the ages of 18 and 39, Futurpreneur Canada can aid you in finding a suitable mentor.

Select a business structure

The subsequent step involves choosing a structure for your new company. In Canada, there are three common types of business structures, each with its own advantages and disadvantages.

• Sole proprietorship—A sole proprietorship is a relatively informal and easily established business structure, which is why it is the most popular choice for new entrepreneurs. In this structure, the business and the owner are legally and financially indistinguishable. The drawback is that the owner assumes personal liability for all responsibilities and debts of the business.
• Partnership—A partnership, similar to a sole proprietorship, involves the participation of two or more owners. Although there is no specific legal framework for partnerships, the partners generally have a contractual agreement that outlines the distribution of revenues, expenses, and tasks.
• Corporation—Incorporating a business creates ownership shares, which establish a legal and taxation separation between the company and its shareholders. This arrangement offers tax benefits for owners, liability protection from the company's debts, and safeguards the company's name to a certain extent. However, incorporating a corporation incurs initial and ongoing costs for legal and accounting services.

How to register as a corporation

To establish your company as a corporation, you must proceed with the following course of action:

Advantages and disadvantages of various business structures

Behold a condensed overview of the benefits and drawbacks associated with the three most prevalent business structures.

Sole proprietorship

Partnership

Corporation

Legal classification

Does not possess autonomous status as a distinct legal entity.

Proprietorship equates to ownership.

Does not possess autonomous status as a distinct legal entity.

Partnership involves partners as proprietors.

Corporation is deemed separate from its owners in the eyes of the law.

Corporation entails shareholder ownership.

Control

The proprietor exercises absolute control.

Control among partners is determined through partnership agreements.

Directors and shareholders hold the reins.

Profits

Profits are disbursed to the proprietor.

Shares profits as outlined in the partnership agreement.

Retained or dispersed by the corporation. Shareholders may be awarded dividends, or they may remain within the corporation.

Debts

The proprietor is liable (unlimited liability).

Partners bear responsibility individually and collectively.

Settled by the corporation.

Taxation

The proprietor is subjected to personal taxation on the business's income, akin to being employed.

Each partner faces individual taxation based on their share of the income.

The corporation pays corporate taxes separately from taxes paid by directors and shareholders.

Assets

Business assets are exclusively owned by the proprietor.

Partners collectively own business assets, and/or ownership is regulated through partnership agreements.

Business assets fall under the ownership of the corporation. Shareholders do not hold any specific claim to corporate assets.

Are start-ups required to pay taxes in Canada?

Should you provide taxable goods and services in Canada, and your total taxable revenues surpass $30,000 in any single calendar quarter or in four consecutive calendar quarters, you must register for the GST/HST. Extensive information is provided on the Canada Revenue Agency’s website.

Moreover, you may also be obliged to collect income tax for the profits you accrue. At the conclusion of your initial year of operation, you must complete a tax return to determine the extent of your tax liability, if any. Income tax laws differ across provinces, territories, and the federal level. It is advisable to enlist the expertise of a professional accountant to facilitate the completion of your annual tax return.

The Canada Revenue Agency extends a complimentary liaison officer service to small business owners and self-employed individuals. This service serves to clarify their responsibilities relating to business taxation. For additional details, please visit this link.

Selecting a business name

Careful consideration should be given when choosing a name for your business, as it is an endeavor that should not be trifled with. In fact, it may prove to be more arduous than one expects. Your business name should accurately reflect your enterprise, be memorable, and, above all, be available for use. The name you choose will often shape your company's initial impression on potential clients, so choose wisely.

Before finalizing your decision, pose the following questions to yourself:

• Does the name aptly represent my business and its offerings?
• Does it possess ease of recall?
• Is it truly distinct and unique?

According to law, your chosen name cannot be identical or closely resemble an existing corporate name or trademark. Hence, it is crucial to thoroughly research existing business names before making your selection. Most companies are required to register their business names with the government. However, if your sole proprietorship operates under your legal name and personal bank account, registration may not be necessary.

Permits or licenses may be required for your business operations. Explore the following website to determine what is needed or contact your province, territory, or local municipality.

Are you concerned about protecting your ideas or inventions from being copied? Familiarize yourself with intellectual property protection. Visit the website of the Canadian Intellectual Property Office (CIPO) for more details.

Create a comprehensive business plan

With the progress you have already made, you are well on your way to establishing a business. Now, it is time to craft a business plan. This document outlines your business vision and provides detailed strategies for achieving it.

Your business plan should incorporate the following components:

• Executive summary—An overview of your business plan.
• Business overview or company profile—Description of your products and services, the target market, and industry trends.
• Sales and marketing plan—Identification of your target customers and your marketing and sales approach. This section also includes pricing and distribution information.
• Operations plan—Details about your location, equipment, production planning, customer interactions, research and development, and other critical operational information.
• Human resources plan—Number and characteristics of employees, as well as policies for recruitment, training, and retention. Sometimes included within the operations plan.
• Action plan—A schedule for achieving specific milestones in establishing and operating your business.
• Financial plan—Important financial details such as projected revenues, expenses, cost of goods, cash flow, and a budget for the first 12 months.

Compiling this information into a single document will not only provide you with a roadmap for business development, but also supply potential investors and lenders with the necessary information to make financing decisions.

BDC's article on How to write an effective business plan offers further guidance on key plan elements. Additionally, our article on Common mistakes to avoid when building your business plan provides valuable insights. You can utilize BDC's free business plan template to assist you in crafting your plan.

Craft an impactful elevator pitch

In addition to your business plan, it is crucial to prepare an elevator pitch. This concise and compelling description of your business should be deliverable within 60 to 90 seconds.

The purpose of the elevator pitch is to captivate potential investors, lenders, partners, and customers who may not have the time or inclination to read your entire business plan. It should be concise enough to be shared during a short elevator ride.

Funding your new business

While many entrepreneurs initially finance their businesses internally, eventually most expanding businesses seek external funding.

Achieving funding is a significant milestone in the journey of a new company. There are two major categories of funding available: debt and equity.

Debt financing involves borrowing money that will need to be repaid. This type of financing includes loans from financial institutions and personal loans. You will be required to pay interest on the borrowed amount and make regular monthly repayments.

Equity financing, on the other hand, refers to investments made in exchange for a share of ownership in your business. While it does not have to be repaid, an equity investor will likely expect to be involved in decision-making. Angel investors and venture capitalists are examples of sources of equity financing.

Primary sources of funding for start-ups

Personal investment:

When starting a business, it is important to invest your own money or put up your assets as collateral. This demonstrates your long-term commitment to the business and shows investors and bankers that you are willing to share the risk with them.

Love money:

Love money refers to funds borrowed from your spouse, parents, family, or friends. Investors and bankers view this as patient capital, meaning it can be repaid as your business grows and becomes more profitable. However, it is crucial to understand that a business relationship with loved ones should never be taken lightly.

Business loans:

The most common source of funding for small and medium-sized businesses is loans from banks and other financial institutions.

For new businesses seeking relatively small loans, obtaining an online loan may be the best option. Many lenders now utilize algorithms and artificial intelligence to assess risk. They evaluate your personal credit history, income, home ownership, and current debt in comparison to the credit profiles of numerous other borrowers to make a decision on granting you a loan.

Specialized organizations such as Futurpreneur can also be a valuable resource for obtaining your first business loan.

Credit cards and lines of credit:

Many new entrepreneurs rely on credit cards and lines of credit to finance their businesses. While these sources offer easy access to cash and are often recommended by financial institutions, caution must be exercised. They often come with high, variable interest rates that can deplete your company's cash flow. Term loans, which have lower interest rates and fixed payments, are often a better alternative.

Angel investors:

Angel investors are typically affluent individuals or retired executives who directly invest in start-ups. They often have notable expertise, a vast network of contacts, and technical and/or management knowledge to offer early-stage companies. Organizations like the National Angel Capital Organization can assist in connecting with angel investors.

Venture capital:

Venture capitalists seek technology-driven businesses and companies with high-growth potential in sectors such as information technology, telecommunications, and biotechnology. They invest in the company in exchange for an equity position, supporting promising but higher-risk projects while expecting a significant return on their investment.

Grants and subsidies:

Various grants, subsidies, and other resources can aid in the initial stages of building your business. Although these funds do not need to be repaid, they are limited in availability and can be challenging to obtain. Canada's Business Benefits Finder is a helpful tool for exploring potential grants suitable for your business.

Business incubators:

While not a direct source of funding, business incubators or accelerators can be valuable for networking and accessing resources when starting a business. Most incubators and accelerators focus on the high-tech sector, but there are also local economic development incubators that support start-ups in more traditional sectors.

Advantages and disadvantages of various financing options for start-ups

Benefit

Drawback

Personal investment

Demonstrates your dedication to your business.

Repayment is contingent upon your business's success.

Family and friends funding

Bases itself on your personal connection with the lender and typically involves minimal requirements.

Frequently inadequate funds to fully capitalize your business.

Bank loan

Accompanied by relatively low interest rates.

It must be repaid, typically in monthly installments.

Credit cards

A convenient cash source that can contribute to the development of your credit rating.

High interest rates can rapidly deplete your cash flow.

Angel investors

Often offer valuable knowledge and expertise.

May require relinquishing some ownership in your business.

Venture capital

More open to taking risks.

Expects a substantial return on investment.

Grant

Does not necessitate repayment.

Challenging to acquire.