Planning tips for aspiring entrepreneurs

It’s very likely one of your clients will try his or her hand at being an entrepreneur and will look for your advice, concludes a new survey conducted by Ipsos-Reid on behalf of RBC Royal Bank.

Based on the proportion of respondents to the survey who said they want to be an entrepreneur, RBC estimates 3.3 million, or roughly 13% of Canadians have aspirations of starting their own business. With numbers like these, there is a good chance one of these people will be your client.

The survey finds this group represents virtually all demographics. Many advisors have some sense of how to plan for a client already making a go of it as a business owner, but trying to plan the shift for a client can be a little daunting, says Rina Pillitteri, national director of small business for RBC Royal Bank.

RBC has launched a website, RBC Small Business Tips, that gives aspiring entrepreneurs access to information and resources they can use to start a business. The website also uses data from a survey of more than 2,000 existing entrepreneurs as advice on what works and what doesn’t when running a small business.

Tips on tax laws (53%) and financing (52%) were the two top needs identified by aspiring entrepreneurs. While Pillitteri says these are important, the most important thing aspiring business owners must consider is whether they have the right personality to be their own boss. Aspiring entrepreneurs need to ask themselves if they are committed, flexible, self-motivated, realistic and organized, just to name a few of the important questions. These are all dominant traits of successful business owners.

They also need a business plan, Pillitteri says.

“You need a business plan and to do your homework in making sure you’re prepared for opportunities, obstacles and challenges,” she says. “Some of the questions we ask at RBC are what kind of business are you opening? Are you going to be having employees?”

When it comes to financing the business, Pillitteri says clients need to calculate the start-up costs and determine whether they need a line of credit.

“There are various grants out there. Small-business owners are telling us they don’t know where to go for those grants. We have provided them some information potentially to investigate if a grant is available for them,” she says.

Hugh Smilestone, a CFP based in Halifax, says he has a fair number of clients who look at starting their own business. In his experience, the motivating factor for many has been tax minimization. Rather than have taxes taken from their paycheques by their employers, clients contemplate becoming consultants doing the same job and choosing how to pay their taxes — or maybe trying to incorporate to get a preferable tax rate.

However, he says, recent changes to federal law require a small-business owners to work for more than one employer to qualify as a consultant, which has deterred many from choosing this route.

For those gung-ho to run their own business, Smilestone says the first thing he asks is whether it’s worth it financially.

“The corporate tax rates in Canada are cheap compared to the personal rates. That’s the big piece of cheese that everyone wants,” he says. “There are other costs involved; there is the cost of incorporating.”

Smilestone says his clients have to consider the cost of getting financial statements done on an annual basis through an accredited accounting professional.

“In the past they didn’t do financial statements; they just did the T-2124, which is on your standard personal tax return,” he says. “I ask, ‘Are you making enough money to make incorporation worthwhile? What about the banks?’ Because inevitably, everyone that is involved with a small business is working with some sort of credit facility.”

Smilestone says many of these issues are beyond the technical expertise of financial planner and require an accountant. As an accredited CGA, he can do the financial statements, but he doesn’t work with clients in obtaining debt financing from banks. He says there is a liability risk for his own practice if a client’s creditors start looking to get their money back.

“They know I carry errors and omissions and public liability insurance. I don’t want to be put in a compromising situation. Most of my clients, if they are going to become consultants, there is no real debt involved. If they are carrying big mortgages on rental properties that want to become incorporated entities, then it’s a different animal,” he says.

Finally, Smilestone says, for retired clients who start a business, the corporate model can be quite valuable.

“I had a client who was a university professor. He retired and took his pension. He had significant holdings outside his RRSP and pension, so we set up an incorporated entity for him, and he has done some writing and consulting work during retirement because that’s what he loves to do,” he says. “If you can divide your assets so that your pension is just in your personal name and non-registered assets are say in an incorporated name, again you’re going to pay a higher rate on the investment income in a corporation, but if you also have active business income in the corporate entity, that makes it much better.”

Smilestone warns against setting up a corporation in retirement if the client is not working.

“You can’t just take all your assets and throw them in a holding company and say, ‘Gee, I’m saving money,’ because you’re not. The holding company gets taxed at the highest rate on investment income, but if you mix a little active rate, then there are some opportunities,” he says.

Filed by Mark Noble, Advisor.ca, mark.noble@advisor.rogers.com

(05/08/08)

Mark Noble