In the first part of our new mini series we discussed how Canada Revenue Agency (CRA) classified Amazon sellers, and some of the basic deductions you could claim for your business. Today we will discuss how your choice of business structure affects your tax return.
What is a business structure and why does it matter?
There are three types of business structures:
- Sole proprietor: you are the owner/operator of the business, the business is not incorporated, you do not have partners, and there is no separation between your business and personal liability.
- Partnership: you run the business with two or more people, the business is not incorporated, and you and your partners share the liability.
- Corporation: the business is its own entity and all liability is with the company. You are not personally liable for the company’s debts or obligations.
Advantages and Disadvantages of Each Business Structure for Amazon Sellers
Most small businesses start out as a sole proprietorship. This is because it’s the easiest way to get any company started. You can literally have a computer on a table, and you are in business! The advantage of being a sole proprietor is that your losses can be deducted from your personal income and if you’ve had a bad selling year, you’ll drop to a lower tax bracket. The major disadvantage is you assume all of the liability. Since there is no separation of income between your personal finances and your business finances, you could lose your personal assets (home, car, savings) to pay off business debts. Likewise, if you are sued for any reason or contravene import/export laws, you are personally liable.
As a business grows, its not uncommon to take on partners to help share the responsibilities. The advantages and disadvantages are the same as with a sole proprietorship; and, in the event of a liability, everyone shares the misfortune, making the loss in profits and debt repayments easier to bear.
It takes a lot of work and money to set up a corporation, but it worth it. As the company continues to grow and bring in larger profits, you need to separate it from your personal finances and personal tax obligations. The way to do this is to incorporate. The major advantage is that you benefit from a corporate tax rate and your liability becomes limited. That means if the business fails or you are sued, only the assets of the corporation are at risk. You retain your home and personal assets (unless you used them for business collateral, at which point they can be claimed by the bank). A disadvantage is that many small business owners struggle with the complicated Tax Act and breaking a tax law, even unintentionally, has serious consequences.
CRA Takes eCommerce Seriously, and So Should You
CRA considers income from any source to be income, and that includes your Amazon store, even if its just something you run on the side. That means, no matter the size of your eCommerce business, you need to treat it like a business. Track your profit and expenses. Know when to register for a GST and/or HST number, and be prepared to evolve the business through the structures of sole proprietorship, partnership, and corporation as your successful Amazon store grows.
Don’t Do it Alone
We mentioned above how complicated the Tax Act is, but you don’t have to go through the bookkeeping and accounting side of your business alone. Not only do we work with small business owners, we have software specific for Amazon sellers.
If you are a Canadian with a store in Amazon Marketplace, contact us today.