VI – Entrepreneurship

Is entrepreneurship for you?

Or is entrepreneurship just an unattainable dream?

entrepreneurshipThere is a sad truth that hinders many an entrepreneur’s dream of business success: nine out of every ten businesses fail within the first five years of inception.

Why is this so? Because many prospective entrepreneurs find themselves lacking in three general areas:

  • Lack of financial education and general business knowledge;
  • Lack of working experience in the line of business they wish to invest in; and
  • Lack of key personality traits required to succeed in business.

The factors will be examined in detail in the following post…


Experience and education

You need the technical education and experience in your area of interest to provide a great service or product, whether you’re an accountant, a furniture salesman or a web-designer. But if you have only this, it only qualifies you to be great employee. It doesn’t mean you are able to run a business.

To successfully run a small business, you need to be a “jack of all trades” with a working knowledge in the areas of sales & marketing, accounting & finance, business law, and human resources management.

No one expects you to be an expert in these areas to be a successful entrepreneur, but you should know enough to identify potential problems or issues so you can hire an expert to deal with them quickly before problems get worse. If you cannot even identify a problem, then you’re setting yourself up for some major trouble.

If you’ve considered starting up a business, you ideally should first find a job with a successful employer in the industry that interests you and learn all aspects of how the business is run. You should also enroll in some introductory courses in accounting, finance, business law and marketing at a local college or university.

Personality traits

From our experience, most successful entrepreneurs have the following personality traits:

  1. They are highly organized
  2. They love their work – they are truly passionate about what they do and that gives them an edge over their competition. This translates into a strong work ethic, and the best entrepreneurs are considered “workaholics”.
  3. They have a broad range of interests and talents. In the context of running a business, they are good at selling, financial management and working with people. This goes back to being a “jack-of-all trades” in order to succeed in business.
  4. They can tolerate risk but carefully assess risks before making any major decisions.

To be more specific, there are people who are highly intelligent and educated, but require the emotional security blanket of having a job with a steady paycheque. At the other end of the scale are business people who will make decisions recklessly without first getting facts, analyzing them and then weighing the risks. Neither of these types can be successful entrepreneurs in the long run.


Why? Because you need to know who you’re selling to – what’s the point of being in business if you can’t sell your product or service?

You also need to know how much it’s going to cost to set up and run your business. After all, if you spend more than what you sell, you’ll be losing money. Why be in business if you’re losing money all the time?

Finally, unless you already have a lot of money in the bank, you need to figure out how you’re going to finance the start up costs of your business.

Who are you selling to (define your market)?

If you took our advice previously and worked for a company specializing in your industry of interest, you should have an idea of who you can sell to and at what price.

If you didn’t, and have no idea whatsoever, then stop right here – you shouldn’t be starting a business at all.

Will I make any money (preparing a cash-flow projection)?

The most common costs you’ll incur can be separated into two categories:

Setup costs

  • Legal fees if you’re incorporating your business
  • First and last months rent if you’re operating from rented premises
  • Costs of setting up an IT network, phone and fax system
  • Office furniture

Monthly operating costs

  • Rent
  • Wages
  • Inventory purchases if you’re selling goods
  • Professional fees (accounting, legal)
  • Leasing costs for business equipment
  • Advertising

Once you’re able to estimate what you can sell and your cost of doing business, you (or you and your accountant) are in a position to put together a cash-flow projection that should look something like this:

Mar-10 Apr-10 May-10 Jun-10 Jul-10
Beginning cash in bank 10,000 2,000 8,000 19,000 22,000
Plus – Cash receipts from sales 10,000 15,000 20,000 12,000 15,000
Minus – Initial setup costs
Legal fees – incorporation 1,000
Rent – first and last month 4,000
IT consultant fee 1,500
Office furniture 2,500
Minus – Operating costs
Rent 2,000 2,000 2,000 2,000 2,000
Wages 5,000 5,000 5,000 5,000 5,000
Equipment lease payments 500 500 500 500 500
Professional fees 500 500 500 500 500
Advertising 1,000 1,000 1,000 1,000 1,000
9,000 9,000 9,000 9,000 9,000
Ending cash in bank 2,000 8,000 19,000 22,000 28,000

The purpose of putting together a cash-flow projection is to determine if it makes sense to go into business in the first place. In the above example, the cash-flow projection estimates that the business will make money because the bank account is getting bigger month after month. This budding entrepreneur would start her business with a $10,000 cash investment in her bank account and 5 months later she’ll have $22,000 in her bank account. So if this projection is accurate, then going forward with the business makes sense.

Let’s look at another example:

Mar-10 Apr-10 May-10 Jun-10 Jul-10
Beginning cash in bank 10,000 (3,000) (2,000) 4,000
Plus – Cash receipts from sales 5,000 10,000 15,000 5,000 10,000
Minus – Initial setup costs
Legal fees – incorporation 1,000
Rent – first and last month 4,000
IT consultant fee 1,500
Office furniture 2,500
Minus – Monthly Operating costs
Rent 2,000 2,000 2,000 2,000 2,000
Wages 5,000 5,000 5,000 5,000 5,000
Equipment lease payments 500 500 500 500 500
Professional fees 500 500 500 500 500
Advertising 1,000 1,000 1,000 1,000 1,000
9,000 9,000 9,000 9,000 9,000
Ending cash in bank (3,000) (2,000) 4,000 1,000

In this example, the setup costs and operating costs are the same as in the previous cash flow projection. However, the sales estimates are much lower. If the projected numbers in this cash-flow are accurate, then it may not be a good idea for her to go into this business: she starts out with $10,000 in the bank and loses it all five months later.

These are of course simplified examples, but they illustrate this crucially important point: get accurate information about what how much you can sell and how much it costs to set up and operate. If you don’t do this before proceeding with actually going ahead with the business, it could lead to disaster.

Getting financing

You’ve now estimated how much it will cost to set up the business. It’s now time to get the start-up capital. You have a number of options:

Your own money

  • Many people get the start up money they need by mortgaging or re-mortgaging their homes, or selling property or possessions
  • Banks and other lenders rightfully expect you to make a personal financial commitment – this is called putting “skin in the game”.

Family and friends

  • If you’re fortunate enough to have them believe in your ability to succeed, family and friends may be willing to provide a business start up loan
  • Never, ever approach friends and family unless you have a detailed business plan that will demonstrate why your business will succeed.
  • If you cannot factually demonstrate how your business will succeed, and how you’ll repay them, you are just throwing their money away
  • We’ve seen this scenario play out, which results in broken friendships and strained family relationships

Canada Small Business Financing Program

  • Administered by Industry Canada. Although you borrow the money from a bank, the Canadian government basically guarantees that the bank will be repaid in the event your business fails
  • Provides up to $500,000 of financing
  • You must be carrying on business for profit with gross annual revenues of $5 million or less
  • Loan proceeds can only be used to purchase business equipment, leasehold improvements to leased premises, or to purchase land for business operations
  • You cannot use the proceeds to finance working capital, like inventory or accounts receivable
  • You apply by completing a loan application at your bank. If the bank decides to grant you a loan, they register it with Industry Canada
  • If you give a personal guarantee, you’re only personally liable for 25 percent of the initial amount borrowed. This is a big advantage over conventional loans, which usually require you to personally guarantee 100 percent of the loan borrowed by your business


  • This is a national charity that provides young entrepreneurs (18 to 34 years) of up to $15,000 in start up capital
  • There is a mandatory 2-year mentoring program where you are matched up with an experienced businessperson to allow knowledge sharing and a higher business success rate

Business Development Bank of Canada (BDC)

  • BDC is a Crown corporation owned by the Government of Canada
  • Its goal is to support small businesses in Canada, by providing consulting and financing services
  • Its “Co-Vision” loan program can provide up to $100,000 in financing, which can be repaid over 6 years. If needed, borrowers can postpone principal payments for 12 months
  • The program targets businesses in manufacturing, distribution, services and tourism
  • Loan proceeds can be used to finance working capital, fixed assets, marketing and start-up costs as will as purchasing an existing business or a franchise
  • Must be able to demonstrate realistic market and sales potential
  • Must also be able to demonstrate relevant experience and knowledge about your industry
  • Must be able to give personal and financial references


Most people start their businesses on a small scale and operate initially as sole proprietorships. You only need to register your business name through Service Ontario, either at one of their kiosks or online. As of this writing, the registration fee is $60.00.

However, if you expect your business to regularly incur debt as part of its operations (e.g., purchase of inventory on credit terms, leasing of equipment) or your industry is known to be highly litigious (i.e., there may be a good chance you can be sued someday), then we advise you to incorporate from the outset.

So what is a corporation anyway? A corporation is a legal person, just like you. It can purchase assets, incur debt, file lawsuits or be sued just like a “natural” person. It has many of the same rights as a natural person. Corporations exist as virtual or fictitious persons, granting limited protection to the actual people involved in the business of the corporation. This limited liability is the major advantage of incorporating your business.

So why is the protection “limited” and not “absolute”? Because a director of a corporation (who is usually also the shareholder who owns the company) has personal exposure to certain statutory business debts, such as:

  • GST collected by your business but not remitted to Canada Revenue Agency
  • Payroll taxes deducted from your employees’ wages, but not remitted to Canada Revenue Agency
  • Employer premiums for EI and CPP
  • Up to 6 months unpaid wages and vacation pay of your employees
  • Retail Sales Tax collected by your business but not remitted to the Ontario Ministry of Finance

Also, if you gave any personal guarantees to any of your business creditors, for example, the bank for your loan or your landlord when you signed the lease agreement, incorporating your business will not protect you personally if you fall behind in these obligations. Therefore, to the extent possible, negotiate your way out of giving any personal guarantees for your business.

The easiest way to incorporate is to see a lawyer, who will prepare, have you sign and register the necessary documents to incorporate your business. Unfortunately, between legal fees and government registration fees, it costs quite a bit more to incorporate compared with registering a sole proprietorship.


A frequent cause of personal financial difficulties is the failure of a business and the attendant business-related liabilities personally owed by the company owner. Here are some simple suggestions to preemptively protect your personal assets in the event the business fails:

  1. As we suggested in the previous section, consider incorporating the business. Incorporation will provide you with a level of creditor protection. So long as you’ve been current on paying your statutory liabilities (listed in the previous section) and those creditors for which you gave a personal guarantee, you’ll be personally protected from your other business debts.
  2. Consider transferring personal assets to a spouse’s name or a family trust. After the transfer, these assets no longer owned by you and are therefore not subject to claims of your personal creditors.
  3. If you are putting away money for retirement, consider investing in RRSPs that are exempt from the claims of your personal creditors; for example, segregated funds. The distinction between segregated funds and mutual funds is that segregated funds are insurance contracts. The Ontario Insurance Act provides that:

“where the beneficiary of the insurance contract is a spouse, child, grandchild or parent of a person whose life is insured… the rights and interests of the insured in the insurance money and in the contract are exempt from execution or seizure…”

Therefore, insurance products held in RRSPs will be exempt from seizure by your personal creditors.

A very important point: you should make these arrangements before you get into personal financial trouble, not after you’ve become exposed to personal debts. If you were to say, transfer your home to your spouse when the bank is trying to collect on the personal guarantee you gave to them, these arrangements will not work. There are laws that can set aside transfers of assets where the intent is to hide your assets from your creditors as they’re trying to collect their debts.

Therefore, make arrangements to protect yourself personally with these tips before you open the doors to your business, not after you’ve closed them!


Finding a location

Many entrepreneurs start their businesses from home. If that suits you, then read no further.

However, if you require actual business premises, you should consider the following factors:

  • How will your customers get to you? Is it conveniently located by public transportation? Is there free parking?
  • How much space will you need to operate?
  • What is the reputation of the landlord? Do they regularly maintain the upkeep of the building premises? You don’t want to turn off potential customers because they think your place looks like a slum.
  • How are the views and lighting? You don’t want rent a place with a view of the wall from the next building. You want to create a nice work environment for your staff so they’re happy and productive.
  • Will you be able to get the landlord to waive a personal guarantee for the lease?

After considering these factors, review the price per square foot and negotiate a mutually agreeable arrangement with landlord. For example, you may be able to get at few months free rent as part of the final lease agreement.

Interviewing and hiring staff

Getting people to submit resumes is always easy. Hiring the right person out of that stack of resumes is not.

It’s been said that the first thirty seconds of a job interview will ultimately determine if the candidate gets the job or not. You either like someone or you don’t. However, even though you might “click” with the candidate, it would be a mistake to hire someone without performing a thorough background check.

It is important that you verify a candidate’s employment history and references as well as their educational background. Even if their previous job experience and educational background have no bearing whatsoever on the position that they’re applying for, it is crucial that you confirm that they’re being truthful to you. If not, then this is a significant character flaw – if they can lie to you so easily, they can just as easily steal from you.

You should also consider performing a credit history search and criminal background check. It is not unusual to meet job applicants who filed bankruptcy or who’ve been convicted of a criminal offence. Everyone has made mistakes in their life and you should not necessarily hold this against the applicant. The honest ones will usually tell you up front about their past before you even perform such a background check. That being said, it is a factor for you to consider in making your final hiring decision.

Advertising your business

Whether you advertise using “traditional” methods like print media and television, or “modern” methods such as internet advertising depends on your audience.

If for example, you are targeting an older demographic (say over 55 years), then traditional advertising may be the way to go. On average, this demographic tends to spend more time reading newspapers and watching television than younger people.

On the other hand, if you are targeting a younger demographic, then internet advertising may be the way to go. It is not surprising that traditional print media like newspaper companies and television stations are in serious financial trouble. Their audience (and advertising revenue) is shrinking because more people are getting their news and entertainment through the internet.

Advertising in print media like the Yellow Pages or in newspapers can be very expensive (especially in a market like Toronto). From our personal experience, we’ve found that advertising on the internet is the most effective and cost efficient way to reach out to our audience.

There are many freelancers who can help you design and place a website on the internet. However, you also want people to find your website when a prospective customer types in a search term into a search engine like Google or Yahoo! For this, you’d need to hire a Search Engine Optimization consultant (SEO).

An SEO will essentially make your website more “searchable” by search engines. This is usually done by, among other things, integrating certain keywords into the text of your site, building “links” to your site from other websites, creating “cost per click” web advertising campaigns with Google Adwords or Yahoo Search Marketing, and listing your business in Google’s Local Business directory



  • If you provide a good or service in Canada and your annual revenue will exceed $30,000, you’re required to register your business and collect GST
  • If you’re operating as a sole proprietor or you are the director of a corporation, you’ll be personally liable if you don’t collect and/or remit.


  • If you sell goods to “end-user” consumers (as opposed to reselling to another business), you’re required to collect and remit provincial sales tax
  • If you’re operating as a sole proprietor or you are the director of a corporation, you’ll be personally liable if you don’t collect and/or remit.

Payroll tax

  • You are required to deduct income tax, CPP and EI withholdings from your employees’ wages and remit these withholdings to the Canada Revenue Agency every pay period
  • You are also required to pay CPP and EI premiums, calculated as a percentage of your employees’ wages
  • If you’re operating as a sole proprietor or you are the director of a corporation, you’ll be personally liable for failure to remit withholdings and/or premiums to the Canada Revenue Agency

Corporate Income Tax

  • The federal corporate tax rate is 38 percent of net income
  • If you’re operating as a Canadian Controlled Private Corporation (essentially a company incorporated in Canada whose shares are privately owned by a Canadian resident), this rate is reduced to 28 percent
  • For the first $500,000 of net income earned by a CCPC, there is a further reduction to 11 percent
  • In Ontario, the provincial corporate tax rate for a CCPC is 14 percent of net income. The first $500,000 of net income earned is taxed at 5.5 percent
  • The combined federal and provincial corporate tax rate in Ontario on net income under $500,000 is 16.5 percent
  • There is no director liability for non-payment of corporate income tax.



  • Employers contribute to WSIB, which is a provincial insurance fund.
  • The amount of premium payable is based on the size of your payroll and the accident experience in your industry. For example, a mining company will pay a higher premium for its employees than an accounting firm
  • Injured workers are compensated by the WSIB on a “no fault” basis; that is, compensation is paid no matter who is at fault, the employer, the employee or someone else. In return for automatic compensation, the employer is shielded from any other liability. An employee cannot sue your company for negligence if that negligence causes a work-related injury
  • The main focus of the WSIB system is to get the injured employee back to work as soon as possible. If injured employee cannot perform his or her regular work, your company may offer suitable modified work that the worker can perform without aggravating the injury. If the work is, in fact, suitable the injured worker must accept it.
  • There is no director liability for unpaid WSIB premiums of a corporation

Wages and vacation pay

In Ontario, your obligations to your employees are governed by the Ontario Employment Standards Act. You are required to give your employees:

  • Two weeks vacation
  • Termination pay, which increases with the length of employment
  • Severance pay where: (1) an employee has worked at your company for at least 5 years and; (2) your annual payroll is $2.5 million or more. The amount payable increases with the length of employment
  • If you’re operating as a corporation, a director of the corporation is personally liable for up to 6 months’ unpaid wages and vacation pay


Segregation of duties

The basic concept is this: the person responsible for the recording of assets coming in and going out of your company should not be the same person who handles those assets. For example:

  • The person who approves invoices for payment should not be responsible for writing and signing cheques. He has an opportunity to defraud the business by making payments to fictitious companies
  • If the purchaser orders and receives the goods, he can place an order for more than is needed and keep the rest.
  • If the person who writes the checks handles the bank reconciliation, no one will know if he writes checks to himself or relatives.

When starting out your business, this usually won’t be an issue as you will be the only employee along with perhaps a handful of staff. However, as your company grows and you hire more staff, internal control through segregation of duties becomes extremely important.

Periodic Financial Statements

This would include a balance sheet, profit & loss statement and cash-flow statement. It is crucial that you regularly monitor your businesses’ financial performance on a periodic basis. This is particularly important during the first few years of business – you need to know if you are making money or losing money, and when to call it quits if you’re operating at a loss.

Ideally, you should prepare financial statements on a monthly basis, so you can make the necessary adjustments to your business operations if you determine that you’re spending too much in certain areas or whether your sales targets are being met. If you wait until the end of your business year to prepare the financials, you may not realize the problem areas in your business operations until it’s too late.


The authors are respectively a Licensed Insolvency Trustee and a Chartered Professional Accountant, both practicing in the country’s largest city and financial centre. Consequently, we have come across many individuals who’ve literally lost everything after having failed in business. This article was written to assist the reader in avoiding the pitfalls that hinder many entrepreneurs. However, it is an overview rather than a complete analysis of issues facing a prospective Canadian entrepreneur. Before applying any of these suggestions, consult your professional advisor. If you reside in Toronto and are looking for professional advice on how to set up or wind down a business, please contact the writers directly.

This post should not be interpreted as legal advice or a legal opinion. Please consult your professional advisor to review your own particular circumstances.

© Copyright Victor Fong and Jenny Lin 2010.