We live in an age when more people than ever are their own bosses and run successful companies from the comfort of their own kitchens and living rooms. The same is true for future fashion moguls who use their eye for trends or tailoring skills to start a home-based fashion business.
Whether you design custom t-shirts online or sell curated collections of thrift vintage clothing, follow these tips to help you stay on top of your finances and tax obligations.
Picking the Right Business Structure & Registering with the CRA
If you haven’t already, you need to register your home business with the CRA if you plan on making an income from it. As the founder of a business, you must decide on the type of business structure you will use as it affects how much you pay in taxes, how you pay your taxes, how you deduct expenses and liabilities, as well as many other financial and legal issues.
There are three main business structures: sole proprietorship, partnership, and corporation. Before deciding on the right one for your fashion business, you may want to consult an accountant first, especially if you plan on growing the business and taking on employees. Changing it becomes more difficult when you’ve already started making money and settled on an accounting method.
Here is some basic information on each structure.
Sole Proprietorships
This is the most common structure used by people operating a “one-person show,” like professionals and contractors. The income you make, and expenses you pay are reported on your personal tax return. A sole proprietorship is easy and inexpensive to register.
Partnerships
You can think of a partnership as a sole proprietorship for two or more people – income and expenses are divided by the partners and reported individually on each partner’s personal return. A partnership is also relatively easy to register with the CRA.
Corporations
Corporations provide the most financial and legal protection to their owner(s), and corporations generally pay less in taxes. However, setting up and registering a corporation usually requires an accountant and a lawyer.
Record All of Your Income and Expenses
Whether you use accounting software, spreadsheets, or pen and paper, you have to account for every dollar you make and spend for your business. Keep all of your receipts and separate and organize them by type, i.e., materials, gas, insurance, food, etc.
Ideally, you are also using these numbers in financial statements like a balance sheet, a cash flow statement, and others to stay on top of your business’s financial health. This is to ensure that you don’t run out of cash while you wait for customers to pay their invoices, that you know how much of a profit you’re actually making, and to help you look for ways to reduce your overall costs or increase your revenues.
Know What Deductions You’re Allowed to Make
Speaking of expenses and receipts, check out common business expenses you are allowed to deduct on this CRA webpage if you’re a sole proprietor or a partnership business before you start accounting for your business’s finances. There are rules around each type of deduction, like when you can use them, the percentages you can claim, and other guidelines you need to follow.
Keep Separate Bank Accounts
One of the most common mistakes small business owners make is using their personal bank accounts for their businesses. This is especially true for home-based entrepreneurs. When registering your fashion startup with the CRA, also open new bank accounts for it and use those accounts strictly for the business. Doing so will help you avoid making accounting mistakes and makes it easier to find any financial discrepancies.
