Part II - Business Basics - Canadian Woodworking Magazine

Hobby To Business: Before you can hang out your shingle, you will need to decide on the form of legal entity that you want your business to be.

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Part II - Business Basics



Illustrations by Mike Del Rizzo

Business Form
Most small woodworking businesses (especially home-based ones) operate as a sole proprietorship or as a partnership.

If you decide to operate as 'John Smith', then you don't need to register the business at all, since a sole proprietorship isn't considered a separate legal entity from the individual who owns it. But be careful: if you want to operate as 'John Smith Woodworking', then you will need to register.

Talk to a business lawyer about the reasons for incorporating. The greatest advantage is limited liability. Disadvantages include more government regulation, higher expenses to organize the business structure, and more record keeping (usually requiring an accountant and sometimes even a lawyer).
 
Sole proprietorship/partnership
 
Advantages:
1) Easy start-up with low costs
2) Most freedom from regulation
3) Minimal start-up and operating capital
4) Easiest bookkeeping/accounting and taxation paperwork, often within the ability of the business owner.
 
Disadvantage:
Unlimited liability - Get insurance coverage, which is your second best way to protect your assets.
 

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Home/Business Insurance
You will need a commercial policy to cover general liability (i.e. property damage, bodily injury caused by you or your products). It is also a good idea to get additional insurance for your business property (i.e. tools and equipment, materials, work in progress, etc.). Hire an insurance broker to shop around for the best price for the coverage you need. Here is some important insurance information that you need to consider. (Those of you who already run a home based business, pay special attention). Be aware that home insurance policies state that the policy is 'null and void' if you are operating a business that hasn't been disclosed to the insurer.


Be aware that home insurance policies state that the policy is “null and void” if you’re operating a business that hasn’t been disclosed to the insurer. So a choice to simply remain uninsured for your business might also mean that your home is uninsured. While your insurer likely won’t demand a much higher premium for some businesses such as bookkeeping or other office work, most insurers consider woodworking to be “manufacturing.” You will likely have to switch insurers to get both the business and home insurance you need.
 
Auto Insurance
A situation similar to the business/home insurance arises with auto insurance. Standard auto insurance does not cover commercial use. Your insurer can deny coverage if you have an accident while using the vehicle for business purposes. It is definitely better to disclose the business use of the vehicle and pay the extra premium than to void your coverage. Talk to your insurer. Some insurance companies offer a special rate which allows partial or occasional commercial use, if the vehicle is not used a lot for business purposes.
 
Zoning
You definitely need to determine the zoning in your area. Most urban areas are zoned for residential use, which excludes woodworking. Don't just assume that because there are hairdressers, seamstresses, or photographers running home based businesses in your area that you can do the same. Woodworking is a distinct type of business, and you will need to determine how it is treated in your area.

Running a business out of your home tends to be more easily done in rural areas. Keep in mind though that zones such as 'Agricultural' or 'Commercial' each have a specific set of uses that they will allow.

Check with your local zoning office before launching your business.

Even when business use is allowed, there are still going to be a lot of restrictions that are better to know about early (i.e. the size of your sign, maximum size of your workshop, etc.).
 
Retail Sales Tax (RST)
In Ontario, businesses that sell taxable goods (or provide a taxable service) must obtain a vendor permit. You must collect the 8% RST and remit it to the provincial government. The RST applies to the products you sell, including the cost of labour and materials. You must levy the tax on taxable services, even if virtually no materials were involved (e.g. a minor furniture repair). RST is not chargeable on projects that become part of 'real estate' (e.g. the sale and installation of kitchen cabinets). However, your final price will include (without showing it on your invoice) the RST on the 'manufactured cost of taxable goods produced for real property contracts'. Get yourself a Retail Sales Tax Guide if you are going to be doing 'built-in' style work.

Ask at your local RST office about Purchase Exemption Certificates. Purchase Exemption Certificates allow you to purchase your materials without RST. For those projects that are not attached to real property, you bill your customers for RST on the entire project price (which includes labour, materials, overhead, etc.). The provincial government receives the RST for the materials when you bill for them, not when you buy them.

You should also ask about the Manufacturer's Exemption. If you qualify for an exemption you can purchase your machinery and tools without paying any RST on them. You may even be able to buy processing materials or consumables, such as solvents, buffing compounds, tape, etc., without paying RST.
 

Goods And Services Tax (GST)
You have to register for GST if you provide taxable goods and/or services in Canada and you are not a small supplier. You are a small supplier if your total taxable revenues (before expenses) are $30,000 or less (in the last four consecutive calendar quarters or in a single calendar quarter).

You can voluntarily register for GST even if it isn't required. This might not seem like a good idea, since it involves more paperwork and you will have to charge your customers more. On the other hand, if you're building a high-end product you might have more sophisticated customers who know that you're a low income-earning business if you're not charging the GST. This can put you in an awkward bargaining position when negotiating a contract.

When you register, you'll be assigned a BN (business number) and you'll be required to file GST returns. When you file your remittances you're entitled to claim ITCs (input tax credits) for qualifying expenses. ITCs can be claimed for various things, such as materials purchased to manufacture your products, operating expenses such as commercial rent and utilities, meal and entertainment expenses, etc.
 
Bookkeeping
As a small woodworking business, bookkeeping is a relatively straightforward process. Even if you have to hire an accountant to prepare financial statements and
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tax returns, bookkeeping is just about recording the day-to-day transactions of your business. Learn to keep a Disbursements Journal and a Receipts Journal using a columnar book you can buy at any office supply store.

Don't underestimate the tax benefits that are available to you if you're a home-based business, such as being able to write off a portion of your mortgage interest, property taxes, and other home expenses. Also, learn how to record your "use of vehicle expenses" if you use your vehicle both for personal and business use. You'll need to set up a log book where you record your mileage for all business trips.
 
Get It Right The First Time
While all of the nuts and bolts of starting a new business will feel overwhelming at first, spend the time getting everything set up properly at the start. Once you get busy giving quotes and building in your workshop, you won't have time to set up the proper framework to keep your business running smoothly on the financial side. You need to make the paperwork side of the business a routine chore so you can devote your hardest thinking to the items you build in your workshop.
 
In Hendrik's next article, he will look at the question of "What will I build?” Hendrik will review various choices such as mass producing small items, and building one-of-a-kind fine furniture.



Hendrik Varju
HENDRIK VARJU is a fine furniture designer/builder who provides woodworking instruction and seminars near Acton, ON.
(519) 853-2027


www.passionforwood.com