Small business bankruptcies on the rise

Back in March, when COVID-19 uncertainty wreaked havoc across the globe, the number of small businesses filing bankruptcy in Canada declined significantly.

As with the decline in consumer insolvencies during COVID-19, the drop in business bankruptcies was due to the array of government support programs and a closed court system. Businesses were on hold, but so too were their debt payments and actions by their creditors.

However, supports won’t last forever. They also don’t eliminate the underlying problem many small businesses face – a drop in revenue and an increase in debts due to COVID-19.

We are already seeing a rise in small business insolvencies. The Office of the Superintendent of Bankruptcy began reporting on individual versus corporate bankruptcies in their 2019 online statistics. Those stats show an uptick in individual businesses filing insolvency beginning in the fall of 2020. We expect these numbers to rise significantly in 2021 as more restaurants, local stores, hair salons, tradespeople, and other small businesses close permanently because of losses incurred during extended social distancing and lockdowns.

That means now is the time for struggling Canadian business owners to familiarize themselves with small business bankruptcy nuances.

The more you know about the bankruptcy process, and the earlier you reach out to a debt professional for advice, the less stressful and financially damaging it will be. There’s even the chance that you can keep your business alive.

With that said, read on as I discuss the notion of filing for bankruptcy if your business debts are overwhelming and what your options are if your small business closes.

What happens to debt when a business closes?

If your business closes and it owes money, does this mean you need to file personal bankruptcy? The answer depends on whether you are personally liable for business debts.

The type of business you operate will partially dictate whether business debts become personal debts as well.

Sole Proprietorship or Unlimited Partnership

Sole proprietors and unincorporated partnerships don’t have separate legal status from the business. As a sole proprietor, you do not have limited liability. Business creditors can pursue your personal assets in addition to any business assets.

A sole proprietor assumes all business risks and is personally liable for all business debts. In a partnership, although you may share profits based on your partnership agreement, each partner can be held personally liable for 100% of any business debts.

If your sole proprietorship or partnership closes its doors, your business creditors can and likely will look to you personally for payment. To eliminate that debt, you may need to file for personal bankruptcy. Filing for personal bankruptcy eliminates both the business debts and any personal debts you may have. 

It’s worth noting that bankruptcy does not deal with secured debts. If you have business or personal assets pledged as security for a business loan, the bank may take possession and realize on those assets to recover the loan balance. They can then pursue you for any shortfall, which can be included in your personal bankruptcy.

Many small businesses fall into this category. They are unincorporated. In this situation, a small business bankruptcy is treated in the same manner as a personal bankruptcy.

It’s not uncommon for a sole proprietor to mix personal and business debt. For example, they often use personal credit cards to fund their business. This is another reason why personal bankruptcy becomes necessary to gain a fresh start.  Both personal and business debts can be taken care of through the same filing.

Corporation

A business that is incorporated is a separate legal entity on its own. If a corporation files bankruptcy, its assets are sold, subject to any rights of secured creditors, and the money is distributed in satisfaction of any business debts. A corporate bankruptcy is costly (professional fees can be $20,000 or more) and usually involves both a Licensed Insolvency Trustee and a bankruptcy lawyer.

An incorporated business can be closed without filing bankruptcy if there are no assets involved. The business can simply close and walk away from any company debt. This is the case for many incorporated small businesses that are not asset-heavy (for example companies in the service industry or trades) and something we see often.

Personal Guarantees

Whether your business was incorporated or not, you are also personally liable for any business debt you have personally guaranteed.

Directors can also be held personally liable for specific statutory obligations, including unremitted HST or GST under the federal Excise Tax Act, unpaid payroll source deductions under the federal Income Tax Act and certain wages under provincial Employment Standards Acts. These types of debts are typically called Director’s liabilities. Businesses that have been using tax remittances as operating cash often cannot catch up on these obligations before the business ends up failing.

Can you restructure the business?

Suppose your business is viable but struggling with a lot of debt (which will be common after COVID-19). In that case, it is possible to restructure your debts through an insolvency proceeding and carry on operating your business.

Declaring bankruptcy or making a proposal to creditors can provide you with creditor protection while restructuring and reorganizing.

For an unincorporated business, we once again look to personal insolvency options to restructure.

If your total debts (both personal and business), not including your home mortgage, fall below the $250,000 debt limit, you may be able to file a consumer proposal. Under this option, you make a deal to repay a portion of your debts to your creditors. If your debts exceed this limit, it is still possible for an individual business owner to file a Division I Proposal to creditors. A Division I proposal has the same result in terms of restructuring your debts but has a slightly different administration structure and, if not accepted by your creditors, it has the added risk that you will automatically be declared bankrupt.

Since a bankruptcy or consumer proposal does not deal with secured debt, you will want to ensure you can keep up with secured payments if you file insolvency to deal with unsecured creditors. While your car loan lender and mortgage lender cannot demand payment of your loan just because you filed bankruptcy, this is not always the case with a secured business loan. Read your loan agreement carefully for any default clauses that might need to be addressed.

A corporation can also restructure its debts via a Division I Proposal or by filing an arrangement under the Companies’ Creditors Arrangement Act. This process is much more expensive, involving the courts, a bankruptcy attorney, and a Licensed Insolvency Trustee.

Avoid creating preference payments

If you are facing financial difficulty and your business is at risk, it’s important not to pick and choose your favourite creditors to repay.

Under bankruptcy law, a trustee is required to inquire into payments, or transfers of property, made in the three months prior to the date of insolvency (12 months in the case of non-arm’s length transactions).  Make a payment to one creditor in preference to another, and your trustee may ask to have this transaction set aside. Such an act is called as a preference under the Bankruptcy & Insolvency Act, and can jeopardize your discharge.

If you have some business assets and are thinking of filing personal bankruptcy, discuss the right course of action with your trustee. They will help you decide if you should liquidate these assets at fair market value before filing with the funds distributed in proportion to your creditors to maximize returns or whether it is best to surrender these assets into your bankruptcy. In either case, be aware that all transactions immediately prior to your filing will be under review, so talk to your trustee before making any decisions.

This is also why it is key to seek advice from a debt professional as early as possible if you are struggling. It is usually much easier to prevent a bad move than it is to try to undo one.

Can you file bankruptcy for government debts?

Tax obligations

Almost all small business bankruptcies involve tax debts. The reason is simple. As stated earlier, often the first payments to be deferred for cash flow purposes are GST or HST remittances and payroll deductions.

Government debts are considered unsecured debt in a bankruptcy or consumer proposal and are dischargeable business debts. The key is to act before Revenue Canada places a lien on any assets converting an unsecured debt into a secured debt.

CEBA loans and CERB

What about debts related to COVID-19 support programs?  The federal government provided several programs to help businesses through the pandemic, notably the Canada Emergency Business Account or CEBA loan and Canada Emergency Wage Subsidy.  Some small business owners (or self-employed workers) may also have collected CERB while their business was subject to shutdown restrictions.

It is possible to include CEBA loans and other government pandemic debts in your bankruptcy as long as those payments were not received through fraud.

We have already filed our first small business insolvency with a CEBA loan and expect to see a significant number of self-employed workers file insolvency for CERB repayment and taxes owing on CERB income.

Can you still run your business after filing bankruptcy?

Yes, people who file for personal bankruptcy can still run their own business.

First and foremost, you make your living running your business. Taking that away from you wouldn’t be fair. The whole idea behind bankruptcy in Canada is to give you a fresh start. That can’t happen if you’re no longer allowed to earn the only way you know how to.

It’s not all cut and dry, however. You’ll need to re-evaluate if it’s possible to get your business back on track. What caused the business’s financial difficulty?  For many business owners in 2021, their business was probably thriving before COVID-19. They may only be facing a business closure due to the prolonged negative impact of shutdowns designed to control the coronavirus.  As I said earlier, it’s possible to file personal bankruptcy or a consumer proposal to eliminate or restructure debts accumulated during the pandemic and start over.

One problem that stems from filing for personal bankruptcy and running your business is you may struggle with access to new credit. Suppliers may or may not be willing to offer financing options since you’re no longer classified as a trustworthy borrower. It’s something to consider before filing. You may be able to change vendors, and you will be able to take steps to restore your credit once your debts are eliminated.

What are the implications of filing personal bankruptcy?

Province-to-province, the rules differ. But regardless of where you live, there are consequences to filing insolvency.

First, you may lose some personal assets. There are provincial and federal bankruptcy exemptions, including essential personal and household assets (e.g., clothes, furniture, other personal items), a small car and most RRSP and pension savings. However, if you have equity in your home or non-registered investments, these will need to be liquidated to satisfy your creditors. In these situations, most people choose to file a consumer proposal as an alternative to bankruptcy as a consumer proposal allows you to keep possession of all your assets.

If you are a shareholder in a company and file personal bankruptcy, your shares become property in your bankruptcy estate to be sold for the benefit of your creditors. This may be a consideration if you own other companies.

One area of concern for tradesperson is tools of the trade. Most provinces have exemptions that allow you to keep a certain dollar value of tools and equipment or business assets necessary to operate your business and earn a living. In Ontario, you can keep up to $14,405 in tools and equipment (at resale value, not new cost).

Most provinces, including Ontario, have legislation prohibiting someone who is bankrupt from being a director of a company until they are discharged. Upon filing bankruptcy, you must resign. Once you are discharged, you may be appointed as director again. You can file a consumer proposal and remain a director since you are not bankrupt.

Pragmatically, you’ll face fulfilling specific duties during the bankruptcy process. For instance, you must report your income to your trustee each month. The government sets a level of what you’re allowed to earn – and if you go above this amount, you must pay more. These extra earnings are called surplus income. If your future income is uncertain, discuss this with your Licensed Insolvency Trustee. They will help you with the decision of whether it makes more sense to file bankruptcy or a consumer proposal to better structure these surplus income payments over a longer period, reducing your monthly payments.

And as noted, either a personal bankruptcy or consumer proposal will be reported on your credit report and will affect your ability to gain new credit for a short period of time.

The main advantage of filing for bankruptcy, of course, is that your problem debts are eliminated.

How do I file personal bankruptcy for business debts?

If your business is struggling financially due to excessive debts, talk with a Licensed Insolvency Trustee about your options. Your accountant can give you a picture of what your balance sheet and cash flow will look like, but a trustee can advise if eliminating old debt through a bankruptcy or consumer proposal is a good option for you.

Sole proprietors and partnerships with nowhere to turn, mounting debts, and non-existent revenue for the next while might have no choice but to file for personal bankruptcy or make a proposal to their creditors.

The key here is that every situation is unique and often complicated. A Licensed Insolvency Trustee will ask questions to help you narrow down the options and possibilities. They will explain the implications of filing insolvency and help you determine the most appropriate way to move forward. They will help you achieve your goal to either close the business and walk away with a fresh start or start over with a restructured balance sheet that will ensure your business returns to profitability down the road.

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Personal vs Business Bankruptcy

If you operate a small business as a self-employed contractor, sole proprietorship or unlimited partnership, any business debts are also owed by you personally. Filing personal bankruptcy in Canada will eliminate both debts from the business and any personal debts you owe.

If you file bankruptcy, any non-exempt personal assets would be forfeit to your trustee for the benefit of your creditors. In most provinces, including Ontario, there are bankruptcy exemptions for tools of the trade which can be essential to contractors.

Filing a business bankruptcy as a corporation would only deal with business debts and would only result in the seizure of business assets. If you are incorporated and have personally guaranteed your business debts, you may need to file personal bankruptcy as well.

What business debts are cleared if I file personal bankruptcy?

If you borrowed money to fund business operations, any unsecured loans, lines of credit or credit card debt will be eliminated through bankruptcy. Filing bankruptcy will also deal with any outstanding utility bills and unpaid suppliers.  

When you file bankruptcy, credit card companies will review all transactions you have made over a minimum of the last three months, so it is important to stop using your personal credit cards for business purchases as soon as you realize that you may be filing bankruptcy.

Secured creditors are not included in a bankruptcy; they retain the right to seize any assets pledged as collateral for the loan.

Landlords have specific rights in a bankruptcy which can affect your right of occupancy if you want to carry on the business and who has a claim against business assets. If you lease a premises for your business, it is important that you discuss your lease with your trustee before you file.

Does bankruptcy clear tax debt?

Filing personal bankruptcy as a small business owner will also eliminate back tax debts including unpaid income taxes, source deductions and HST owing to the CRA. It is important if you owe money to Canada Revenue Agency that you file your tax returns (to determine how much you owe) and act quickly to avoid potential adverse collection actions. The CRA has strong collection powers including registering a lien on your assets, garnishing your wages (if you are now working) and freezing your bank account.

Filing a consumer proposal to deal with business debts

It is also possible to deal with small business debts by making a proposal to your creditors to reduce and change the payment terms on your small business debts.

If your debts, excluding the mortgage on your personal residence, do not exceed $250,000 you can make a consumer proposal to your creditors. A consumer proposal allows you to make an offer to repay your creditors a portion of what you owe. At the completion of your proposal payments, all debts are forgiven. A consumer proposal is a viable alternative if you have assets to protect or are earning income high enough to generate significant penalty payments in a bankruptcy.

If your personal and business debts exceed $250,000 you can make what is known as a business proposal or Division I proposal.

Contact a Licensed Insolvency Trustee to discuss your situation. A review of your business, who you owe money too and how you want to carry forward will help you determine the best option.

The post Can Business Debts Be Discharged in Personal Bankruptcy in Canada? appeared first on Hoyes, Michalos & Associates Inc..

Can I continue to operate my business?

One of the most common concerns is if you are even allowed to continue a business if you file for bankruptcy. The simple answer is yes. However, there are some special issues you will face:

• if you were incorporated, you will have to continue as a sole proprietor; or
• resign as the director (since you can’t be the director of a corporation if you are bankrupt).

What happens to my assets or equipment?

Bankruptcy sometimes means that you lose some of your assets.  For a small business, there is a bankruptcy exemption for ‘tools of the trade’ in Ontario for a realizable (sale) value of up to $14,405.  If your equipment exceeds that value (on a liquidation basis, not cost), you will be required to pay the excess to keep the equipment.

How do you determine my income for bankruptcy purposes?

The length of time that you are in bankruptcy and the amount you are required to pay depends on your income level after the bankruptcy is filed.  The concept is called surplus income.  For somebody in a salaried position with the same pay every two weeks, it is very simple to make an accurate estimate.  For somebody who is self-employed or operating a sole proprietorship (unincorporated business) your ‘income’ is based on net income. You are allowed to deduct legitimate business costs first.

Will I have access to credit?

There is the added difficulty that for a small business operator, income can fluctuate, sometimes quite significantly.  This uncertainty makes it more difficult to determine the financial cost of bankruptcy.

Because of the variable nature of income, business owners tend to rely from time to time on overdraft or a line of credit.  If you’ve filed bankruptcy, the existing credit facilities are gone.  To apply for new credit, you are required by law to disclose that you are in bankruptcy.  It might be that you are unable to obtain new credit.

Can I include debts owing to Canada Revenue Agency?

Income taxes and sometimes HST are often the largest debt for small business owners or self-employed individuals.  A bankruptcy and consumer proposal are both options for tax debt relief.  The exception would be if the CRA had registered a tax lien against your property prior to the bankruptcy being filed, since the lien makes the debt secured and bankruptcy only discharged unsecured debts.

The other issue with income taxes is keeping up to date after the bankruptcy is filed.  Unlike credit cards, you do not need to be credit approved to incur new tax debts.  Sometimes the challenge is because the business is struggling.  Sometimes the challenge is because people are not good bookkeepers or don’t properly understand their tax obligations.  Paying for an experienced bookkeeper is money well spent.

Do I have other options?

Yes, one of the most common alternatives to bankruptcy is to file a consumer proposal. A proposal allows you to keep all personal assets, including those you may be using in your business, and make a deal with your creditors to repay a portion of what you owe.

As you can see, there are many things to consider if you are filing bankruptcy and are self-employed or operate a small business.  A licensed trustee can help you understand the issues so that you take advantage of the opportunity for a fresh start that a bankruptcy or consumer proposal brings. Contact us today for a free consultation. Will will review your situation, give you a plan to deal with your debt and answer any questions you have.

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Awareness of consumer proposals has grown significantly in recent years as more and more people understand the benefits of a consumer proposal. Listed below are five things you should know if you’re self-employed and you’re considering a consumer proposal.

#1 – Don’t Assume That You Won’t Qualify For a Consumer Proposal

Suppose that you have a friend, co-worker or family member who filed a consumer proposal and speaks very positively about how it helped get his or her debts under control. You, however, are self-employed. You are in business for yourself. But, does that mean that you are ineligible to file a consumer (ie. non-business) proposal? Not necessarily.

Assuming that you can’t pay your debts in full by selling assets like your house or investments, the biggest eligibility consideration is tied to the amount of your debt. You’re eligible to file a consumer proposal if your consumer debt is more than $1,000 but less than $250,000. Consumer debt is defined as all debt except those debts that are secured against your residence. Huh – what does that mean? Add up all your debts, except for the mortgage if you have a house. If the total is less than $250,000, you are eligible to file a consumer proposal.

Listen to our podcast: Self Employed: Dealing with Business Debts

A consumer proposal is an effective means to gain control over virtually all kinds of unsecured debt, including amounts owed to Canada Revenue Agency. To ensure that you are eligible and to identify if there are any limitations, make sure that you disclose all of your debts to your licensed insolvency trustee.

Keep in mind that you are required to maintain payments on secured debts if you want to keep the related asset. Common examples of a secured debt are mortgages and car loans. Self-employed individuals may also have secured loans for tools or other specialized machinery and equipment.

#2 – You Can Continue to Be Self-Employed, But Should You?

A common concern is if you are permitted to be self-employed after filing a consumer proposal. The simple answer is yes. There are no legal restrictions that bar you from being self-employed if you file a consumer proposal.

The more important question is if you should continue to be self-employed. Some people look back in hindsight and realize that they would have made more money if they worked for somebody else as an employee, with far less stress and risk involved. It is important to take a step back and assess the overall viability of your business. Is there a chance for growth? Are there opportunities to reduce costs?

Filing a consumer proposal is about achieving a fresh start from debt problems. There is a high risk of future debt problems if you don’t see the business generating enough income to maintain your lifestyle, even without the full burden of the past debts. On the other hand, some people only need a chance to restructure the debts so that their business can take a significant leap forward in terms of growth and profitability.

#3 – Your Assets Are Protected

Some people who are self-employed don’t have significant tangible assets. For others, there are specialized assets that are integral to making money. Creditors are blocked from seizing your assets after filing a consumer proposal due to the stay of proceedings provided by a consumer proposal.

Compare a consumer proposal to bankruptcy: bankruptcy can mean having to surrender some of your assets to be liquidated, with the funds going back to your creditors for partial compensation of the debt. With a consumer proposal, you are not required to relinquish any assets.

Think of it as a settlement of the debt, where the creditors will most times agree to it if they see you are offering to pay back more than if you had filed bankruptcy. That’s how the payment amounts for a consumer proposal are determined. You get to retain your assets, but it’s viewed as a fair deal for both sides considering the alternative (ie. bankruptcy).

#4 – There Will Still Be Peaks and Valleys

Most people who are self-employed do not have guaranteed income that is paid on a consistent, regular basis. Hustle is the name of the game to make sure you have enough work in the pipeline. Filing a consumer proposal obviously does not change this.

The nice part about a consumer proposal is that the debts are dealt with via one monthly payment. There’s no need to juggle the Canada Revenue Agency along with multiple credit cards and lines of credit. There is also some flexibility with respect to the payments. If you have a down month, you can make a reduced payment or skip it altogether with no immediate consequences. The key is that you don’t get behind by three months. If that happens, the consumer proposal is annulled and you are back to square one.

In the past, you would have relied on credit to get through the valleys. Access to credit will be limited after filing a consumer proposal. You may have viewed credit as a security blanket, but it wasn’t necessarily a good thing. Limited credit will really force you to manage your cash flow closely.

#5 – Beware The Tax Man

Finally, we come to money owing to the Canada Revenue Agency. The CRA. The Tax Man.

When somebody tells me they are self-employed, my immediate concern is how much is owed to the CRA. Even though banks grant more credit than they should, there is no credit application process with the CRA. You don’t get pre-approved for credit (read: debt) with the government. And, the numbers can snowball out of control very quickly, especially when you add in the penalties and interest.

Luckily, CRA debts can be included in a consumer proposal. Full disclosure: it can sometimes be difficult to get the CRA on board with a consumer proposal when they are the largest creditor, even if it is a “fair deal” compared to bankruptcy.

One of the concerns I’ve heard from the CRA in the past, is the risk of future tax debts. They will often want to see the changes you’ve made to guard against new debt problems. This could mean having a professional bookkeeper help you with some of the paperwork and make your GST/HST payments on a more frequent basis. In my mind, these would be very positive changes to make since it is also in your interest to avoid further tax debts since they can’t be added to a proposal that has already been filed.

Ultimately, to determine if a consumer proposal is right for you, I recommend meeting with a licensed insolvency trustee. They can offer professional, honest advice to help you get back on your feet. Plus, the first meeting is free.

The post Self-Employed and Considering a Consumer Proposal? 5 Things You Need to Know appeared first on Hoyes, Michalos & Associates Inc..

On this week’s podcast I talk with Ian Martin, Scott Schaefer and Ted Michalos about the potential debt problems that entrepreneurs and self-employed persons might face and provide tips that can help you avoid these common small business mistakes when it comes to managing your finances.

I also talk with our experts about how to deal with one of the most common business debts: tax debts owing to Canada Revenue Agency.

Financial Tips For Avoiding Small Business Debts

Ian offers these tips to help you avoid mounting business debts when launching your new small business:

1. Have some savings set aside for start-up & living costs. Not having sufficient funds to cover the start-up phase can cause the self employed person to accumulate debt before they are able to start making a profit. Have enough saved up to cover both start-up costs and personal living expenses until the business is generating enough cash flow to provide you a salary.
2. Have a good cash flow projection.  Make sure you have a comprehensive business plan including how you will deal with keeping up with all your payments.
3. Arrange for low cost financing up front. Avoid relying on personal credit cards while running a business as this can lead to personal financial problems as well as increasing business risks.
4. Pay your taxes. Put enough money aside throughout the year to cover income taxes, HST, and CPP contributions. Some self employed people may not be aware that they have different tax obligations or may use tax money collected for their living expenses hoping things will improve and they will catch up later which can cause problems and lead to significant tax debts.

Self Employed & Tax Debts – What Should You Do?

It’s not uncommon for a self-employed person to find themselves owing money to the CRA. When you are employed, your employer withholds income tax and other tax obligations from your pay and remits them to the government for you. As a self-employed person you have to make installment payments. You may also be collecting HST throughout the year which must be remitted. It is dangerous to use that money to fund your business or personal expenses as you will find yourself owing significant money to Canada Revenue at the end of the year.

To help small business owners and self employed professionals, Scott offers these tips to keep tax debts under control:

1. Is the business viable? Does it generate enough revenue to cover business expenses, taxes, and your living costs? Look at monthly statements. See how much you are actually bring in. Is the business making money month over month? How much do you need to live on? How much to you need to deal with outstanding debts.
2. What taxes are owed? Have you remitted your HST? Have you made both the employee and employer contributions into CPP? Have you paid your income tax? File all your returns and figure out how much you owe as a starting point.
3. Start treating yourself like an employee. When you were an employee your employer took taxes off your pay. Do the same. Pay your HST every month. Pay an installment towards your taxes as if you’re an employee. 
4. Consider hiring an accountant or a book-keeper. They will help make sure you keep on top of your payments. A good accountant can ensure you priced your jobs right or create a financial plan to adjust to problems much quicker.
5. Speak with the right professionals before deciding to do something like incorporate your business. Depending on your situation, it may or may not make a lot of sense. Be sure to do your homework and ask the right questions.

What do you if you owe taxes for multiple years?

If you are self employed and owe taxes, make a plan to deal with back debts.

Deal with your tax debt as soon as possible to stop further interest & penalties. If you have the money in the bank, pay CRA. You can usually negotiate a repayment plan with the CRA to pay off back taxes if you can do so in 12-24 months.

If you can’t afford repayment of back taxes, consider a formal procedure like a consumer proposal.  A Licensed Insolvency Trustee is the only professional able to make a settlement offer with the CRA for less than the full amount of your tax debt.

Resources mentioned in the show

• Keeping Your Small Business Afloat While Dealing with Debt
• Overcoming Business Tax Debts: Case Study
• Top 5 Bankruptcy Issues for Small Business Owners and Self Employed

FULL TRANSCRIPT show #93 with Ian Martin and Scott Schaefer

Doug Hoyes: Here on Debt Free in 30 we focus on how as a person you can become debt free. But what happens if you’re self-employed or you own a business and you have debt problems? Is having business debt different than having personal debts? It’s an important question because an increasingly number of people today are self-employed. Many years ago you got a job at the factory or in an office and you worked there your entire life. Today with all of the downsizing and outsourcing secure jobs are hard to find so many people become self-employed.

For some people being self-employed or owning your own business is great. You set your own hours, you don’t have a boss and if you’re successful you can make a lot of money. It’s great. But of course there are also disadvantages. Being your own boss really means being your own company. You’re not just the guy doing the work, you’re also the guy doing the book keeping and paying the bills and fixing the computer when it doesn’t work. You’re responsible for everything, good and bad. Some people like that. Others prefer to just do what they’re good at and nothing else.

There are many occupations where being self-employed is very common. Many truck drivers for example are self-employed. They aren’t employees of the trucking company, they actually own their own truck or tractor as it’s called in the business and they get paid by the kilometre. They can make good money but if they don’t work, they don’t get paid. If the truck needs repairs, they need to pay for it. So, there are advantages and disadvantages when you’re self-employed. Construction is another industry where I see lots of people who are self-employed: roofers, drywallers, frames, plumbers, electricians, they’re all often self-employed. So, what problems can it cause if you’re self-employed?

To find out I’ve asked Ian Martin to come join me. Ian is a chartered accountant, a CPA and a licensed insolvency trustee in the Hoyes Michalos Kitchener and Stratford office. Ian, welcome. As I said in the opening being self-employed has many advantages but there are also some drawbacks and one of those problems is that you’re responsible for all the money management, the finance, the bookkeeping. So, you’ve helped lots of people over the years, what problems do you see self-employed people or people who own their own business getting into?

Ian Martin: Well, I mean you can go a lot of different ways in answering that Doug. And I feel like your intro there kind of hit on kind of the highs and the lows. It’s easy to focus on the success stories that we’ve heard over the years. We can think of examples, my great uncle came to this country and he didn’t know very much, and he built his business with his own hands and now he owns his own house and he’s a true Canadian success story.

However, the opposite at the end of the spectrum is more often the case, meaning that it’s not successful. So, I think the biggest challenge if you compare to someone who’s an employee is with a regular pay cheque is that when you’re the ‘man’, when it’s your business is having the regular sustainable cash flow so you can manage all the other aspects of your life.

You said already that when it’s your business when you’re the ‘guy’, it’s not just raising the business and finding the clients it’s doing that, it’s doing the work, it’s paying the bills, making sure you’ve set aside all the money for all your different tax obligations, take care of the bookkeeping or finding the appropriate people to help you with those things. So, it’s not just an idea, it’s having an idea and also a comprehensive business plan to get through it. But then also having the financial backing to kind of whether the storm of kind of the ups and downs.

Doug Hoyes: So, let’s talk about that. Financial backing, so what do you mean by that? You’re saying that when I start a business it’s not like when I get a job, I don’t have to have any cash in my pocket when I start a job ’cause I’m going to get my first pay cheque in two weeks.

Ian Martin: Right, exactly. So, there’s lots of businesses where, when you’re starting the business there’s what we call the start up costs. Where, one of the examples that you gave was the truck driver, what we call the owner operator. Well, that means you own a truck. And it’s not like buying your Ford F150 where it might be 30, 40, $50,000, we’re talking about trucks. It can be hundreds of thousands of dollars. So, with that you’re either having the capital to pay for that or having like a huge, huge monthly payment that can be several thousands of dollars. Well then you need to be bringing in enough money to cover those costs.

Doug Hoyes: Yeah so even if I’m able to go out and finance a brand new truck and even if my monthly payment is going to be, I don’t know, $10,000 a month on the truck, I’ve also got to pay insurance, I got to put fuel in it and whatever other costs I’ve got associated with that. And I don’t get my first pay cheque the first day.

Ian Martin: Right. And what I find, I mean it’s probably part of the work that we do in helping people who are insolvent is that a lot of people, they go into business for themselves when other things haven’t worked out. I met with a guy just last week and, you know, nice guy, very articulate, very well educated but within his industry over the last 15 years he’s been the casualty of four or five different layoffs over the span of the last 15 years. And has become very I’ll say skeptical or cynical in the big corporation and working for the ‘man’.

So, understandably he’s decided he wants to be his own boss and we had a good conversation last week and he has opportunities to be an employee for somebody else and have a decent paying job. But he said to himself I need to give myself enough time to see if I can do this on my own. So, he’s given himself six months. He has some contracts, he is – to be true to himself he wants to make sure that he can make it good a business for himself. And if it proves at the end of the time period that he can’t, he’s got to fall back.

But I guess the point I was trying to make there was so many people they find themselves where they’ve been a casualty, where they’ve lost their job and then there might already be some debt problems. And then they go into business for themselves. So, instead of having saved up, you know, $10,000 or $20,000 or $30,000 to cover the expenses in the start up phase, they’re relying on credit or basically debt to get them through the start up phase.

Doug Hoyes: And you think about this particular guy so and we’re not going to talk about what kind of business he’s in or anything because that’s not necessary. But the first month he starts his own business he’s out there looking for clients, he maybe finds some clients, he’s probably not getting paid anything the first month. Maybe not the second or the third month but he’s still got to pay his own rent, still got to buy his own groceries. So, he’s still got to have 2, 3, $4,000 coming in every month just to pay his living expenses.

Ian Martin: Right, well that’s the key. We talk about business expenses but this specific person I’m referring to, he’s married, he has a couple of kids at home. So, it’s not only having enough money to cover your business expenses but then also it’s replacing the pay cheque to cover your personal, your living expenses as well and that can be a tremendous challenge if you don’t have the money saved up to get over the hump of the first however many months to have the regular contracts, the regular cash flow come in.

Doug Hoyes: Yeah. And most people aren’t super rich when they start their own business otherwise why would they bother? You’re right, they either have no money or they’re already in debt and they’re just trying to get back on track.

So, from a cash flow point or view then what you’re saying the number one problem you see that people run into when they’re starting a business or when they’re self-employed is not having enough cash in their pocket when they start and there’s two things you got to consider, your own personal expenses, which don’t go away, your rent, your groceries, whatever and then whatever it’s going to cost you to operate the business. So, if you’re going to be a truck driver and you’re not going to get your first pay cheque for six weeks, can you put fuel in the truck, can you pay the lease payments for those first six weeks? If you can’t it’s going to be a serious problem.

Ian Martin: Right exactly. And from the work that you and I have done, Doug, I mean we see people that, the ideal situation like we said is that you saved up the money, you have the cash flow projection, you’ve got your comprehensive business plan. And you know you have the savings to get over that hump of the first however many weeks or months. But if you don’t, it’s human nature that you rely on credit to get over that start up phase.

Doug Hoyes: Final question I want to ask you before we take a break is taxes. So, you in a past life worked for a big government agency that collects taxes, we won’t mention their name.

Ian Martin: You might guess what it is though.

Doug Hoyes: Their initials are CR and A. So, I start my business and it’s not like being an employee where the taxes are coming off my pay cheque every week. No taxes are coming off. I’m getting a cheque and then at the end of the year I file my taxes and if I’ve been successful I now owe money but I haven’t put any money away and now I’m really in trouble. Is that something you see quite commonly?

Ian Martin: Well, you set me up there. You know the answer is yes, Doug. And I feel like when people – with the tax end of the challenge that we’re talking about here it’s really twofold. Number one, I see a lot of people who get into being self-employed who don’t truly understand their different obligations to be setting aside the money for their tax installments or their HST account. So, sometimes it is a lack of knowledge.

But then also secondarily even if there is that knowledge and understanding just as we were saying earlier you’re getting through that start up phase and the cash flow is tight, even if you know that you should be setting aside the money for those different obligations for next year, you just can’t. You still have to pay for the rent or the mortgage, got to feed your kids and your family. You know it’s not the right thing but you take the government’s money and you’re paying for those other things. So, when you’re paying your taxes the following year it’s just not there. Maybe the first year it’s not so bad and, you know, the business is getting a little bit stronger and you feel like you can build up and catch up but if that snowballs for two or three years, that can be a pretty big mountain to overcome.

Doug Hoyes: Yeah and the government doesn’t just wait around, that’s the –

Ian Martin: Well, that’s the tricky part with them. They will kind of be asleep for maybe a couple of years. But by the time they do wake up then you’re behind on your taxes and your HST by two or three years, by that point unless the business is really, really grown and matured it can be tough to overcome that.

Doug Hoyes: Yeah and they’ve got lots of power to do lots of things. So, excellent. Well, I appreciate that. We’re going to talk about more in the second segment about taxes and some other factors that affect self-employed people. I’m going to bring your partner Scott Schaffer to talk about that. Ian, thanks very much for being here.

Ian Martin: Thanks very much Doug.

Doug Hoyes: Thank you. We’re going to take a break and we’ll be right back talking about issues that affect self-employed people and small business owners right here on Debt Free in 30.

Doug Hoyes: In the first segment we talked about how a self-employed person can get into financial trouble. The common scenario is that you start working as a self-employed person and you’re making good money. And then at the end of the year you realize you haven’t made any tax payments and now you owe the government a bunch of money. When you’re an employee working for someone else, taxes get taken off your pay cheque every week so at the end of the year when you file your taxes you’ve probably paid enough and may even get a refund.

But if you’re self-employed and you’re responsible for paying your own taxes and that’s where you can get into trouble. So, what happens if you haven’t paid your taxes? What are your options? To find out I’m joined by Scott Schaefer who is also a chartered accountant, a CPA, and a licensed insolvency trustee working with Ian Martin in our Kitchener and Stratford offices.

So, Scott when you meet with someone for the first time and you know potentially in the future taxes are going to be a problem, what’s your starting point with them? What’s the first thing you discuss to make sure that that’s not going to be an issue?

Scott Schaefer: Yeah so we first sit down and we look at is the business viable? So, we don’t think too much of the past right away, we look at the business as it is today. Is the business making money? Is it viable? If it wasn’t for the tax debts or the debts that you’re carrying at this point, could this business be a very profitable, a very viable business?

Doug Hoyes:  So, by viable you mean in simple terms is more cash coming in every month than going out?

Scott S:: Yeah, are you making money?

Doug Hoyes:  Are you making money, that’s really the question. And that seems like an obvious question, are you making money? Well, if I’m not making money wouldn’t I know it? Why would that be an issue?

Scott Schaefer: Well, if somebody hasn’t filed their taxes, if they haven’t put a reserve for it and they don’t have the money for that then they may not have been making money. They had enough cash flow to come in to pay for their own expenses but the business hasn’t actually been making enough money to pay for the taxes, the HST, the suppliers things like that. There’s accumulation of debt that may not be known at this point.

Doug Hoyes:  So, if I’m a self-employed guy or girl and I’m, I don’t know, I’m doing some let’s say it’s a service kind of business, maybe I’m in construction, maybe I’m a massage therapist, whatever. And over the course of the year I’ve brought in $40,000 after paying my expenses, so, after paying my rent and everything. What kind of tax obligation am I going to have? I mean am I – is that like 10%, 20%, 50%.

Scott Schaefer: It’s not much higher. You’ll have the HST so if you haven’t remitted your HST that you’ve been collecting along the line because if you have sales of more than $30,000 you have to have an HST account, so have you set aside the HST?

Doug Hoyes:  And that’s 13% of your revenue in Ontario.

Scott Schaefer: Correct.

Doug Hoyes:  Different numbers in different provinces.

Scott Schaefer: And you’ll get some deductions for the input tax credits but 13% think of that as a starting point. Then you’re looking at your personal taxes. You would be paying both the CPP for the employee and the employer portion, which that’s you, you’re both sides. You’re the employee plus employer.

Doug Hoyes:  And that’s a big difference from being an employee, because when I’m an employee they’re only taking off –

Scott Schaefer: Your portion.

Doug Hoyes:  Effectively half as much as what the total is.

Scott Schaefer: Correct.

Doug Hoyes:  Okay, so, I’ve got HST that I maybe wasn’t thinking about. I’ve got CPP that I’m responsible for.

Scott Schaefer: And those tax rates about 20, 21%. So, the first $10,000 being tax free so you’re going to be paying at least 20% on the $30,000. So, if you made 40, $10,000 tax free you’d be paying, so you’re at least $6,000 tax debt, plus the CPP and HST.

Doug Hoyes:  And we’re talking obviously very rough numbers here because everyone’s situation is going to be different. You might be in a higher tax bracket than what we’re talking about. But let’s assume your number of $6,000.

Scott Schaefer: And that was barebones so chances are it’s going to be much higher.

Doug Hoyes:  That’s very basic. It’s probably higher. And that’s ignoring HST and the CPP and everything. So, at the end of the year you file your taxes, now you own $6,000. Do you have $6,000?

Scott Schaefer: Right. Will the business allow you to make enough money to pay the current taxes plus this past tax debt.

Doug Hoyes:  And $6,000 means I should have been putting aside $500 a month. Am I doing the math right there?

Scott Schaefer: Yeah.

Doug Hoyes:  So back to your comment about viability then.

Scott Schaefer: Right. Is the business making enough to put $500 away for the current taxes plus pay towards last year’s taxes? And quite often for self-employed it’s a two or three year lag where they’re kind of playing catch up. New business, new experiences, they kind of get behind the eight ball, it happens, you’re out there pounding the pavement to get, you know, revenue in to make money to pay the bills. You may not be on top of your taxes or be so overwhelmed and afraid of that number to file it, it may be a lot bigger than you think it is.

Doug Hoyes:  Yeah and often in the first year you’re not making any money anyways. So, it’s not the first year where you get the huge tax hit, it may be the second year. So, what’s your advice then to someone? Is it as simple as well make sure you’re putting money aside?

Scott Schaefer: First thing I’d like to look at is let’s do a monthly statement? How much are you making per month? Are you actually making money each month? So, we sit down, once again, not looking at the past, looking at the future saying is this business making money month over month? And if so, how much do you need to start putting away? How much do you need to live on? Now do you have money left over to deal with the past debts?

If the answer’s no first know that you can stay current going forward so you have to treat yourself like an employee, so you’ll pay your HST every month, you’ll pay an installment towards your taxes as if you’re an employee and it goes right away. And then we figure out a plan to deal with the past debt. Because it so big that you won’t be able to stay current and deal with the future plus the past.

Doug Hoyes:  Are you a big believer in a self-employed person hiring a bookkeeper or an accountant or someone like that to help you with that part of the business?

Scott Schaefer: Absolutely. For me as an accountant, I would never do any electrical or plumbing on my house. I will always hire the proper service to do that. I think if you are brilliant at your trade, hire an accountant or bookkeeper to keep you current.

Doug Hoyes:  And just so you don’t think we’re tooting our own horn here, you and I are both CPAs, chartered accountants, but we don’t do books for people.

Scott Schaefer: No.

Doug Hoyes:  That’s not the business we’re in. So, we’re not saying come to us and we’ll be your bookkeeper, we’re not the experts in that.

Scott Schaefer: There are people who are brilliant at bookkeeping. The thing about accounting is, it’s always historic data, it’s after the fact. I like it if you have a bookkeeper you can drop off your box of envelopes and slips each month and they just kind of summarize it. You always know whether your priced your jobs right, you always know whether you’re making money, you know you can adjust to things much quicker.

Doug Hoyes:  And it’s money well spent.

Scott Schaefer: Absolutely.

Doug Hoyes:  And should I be incorporating if I’m going to be a business, first of all what does that mean?

Scott Schaefer: Incorporation is just a legal entity so you incorporate a business. My general suggestion is that if it’s a personal trade business so you are just a massage therapist, incorporating a business is just another layer so you’re now running through corporation, you know have to do corporate tax returns, everything’s running through that. You’ve added a lot more accounting fees. You’ve got lawyer’s fees and you got accounting fees. So the business is not making a lot of money or there’s no good business reason to do so, I generally don’t recommend incorporating.

If it is because you’re building widgets and you’re buying machinery, you’re building all these other things, an incorporation could be a very logical decision at that point because there’s a lot more strategies involved. The cost to incorporate through lawyers and accountants and doing corporate returns makes more sense because the business is making a lot more money, there’s a lot more reason to do so.

Doug Hoyes:  Yeah. If you’ve got 15 or 20 employees, if the business has been around for a few years and it’s making good money then being incorporated makes sense, if you’re just starting out, probably not. And you’re right, you’ve got to pay a lawyer to incorporate the business. You don’t have to, I guess you could do that yourself but I don’t do my own dental surgery so you’re looking at paying someone up front to incorporate, that’s a onetime charge.

But then you’re right, every year you’re doing corporate tax returns and I mean I personally obviously am one of the owners of Hoyes Michalos & Associates Inc., which as you know is a corporation ’cause it’s got the word Inc. at the end of it. I don’t do our corporate tax returns; I hire someone to do that. There’s a cost for that every year.

Scott Schaefer: And a lot of people think that the corporation will prevent them from having personal liability. Some parts are true but really you’re the director of the corporation, you’re responsible for HST, you’re responsible for sourced deductions. If you don’t pay those, those debts will follow you personally. The government has a right to jump through the corporation to come after you for that. Most times the banks going to make you sign a personal guarantee anyways, so, the corporation is just another layer.

So, there’s times it makes a lot of sense and there’s times that don’t, that it doesn’t make sense. The key is to make those decisions off the bat, do you homework, think about it, ask the right questions, talk to an accountant, talk to a lawyer, figure out for yourself right at the get go if that makes sense.

Doug Hoyes:  Yeah so in the first segment Ian and I talked about having adequate financing or cash flow to start your business. So yeah it is a good idea when you’re starting out to have $1,000 or whatever it’s going to take to get the lawyer to do his thing. Have some money to be paying the bookkeeper up front as well as obviously paying all your business expenses up front.

Scott Schaefer: I generally think the more the business will make, the more a corporation makes sense. Because you can afford those costs and there’s more strategies to avoid, to avoid certain things, to deal with it differently, to do different tax strategies, to do it differently. All legally, there’s things you can do for that stuff, it’s just a different strategy. But it has to be bigger numbers to actually have any bang for the buck. If it’s going to be a business making $50,000 there’s not a lot of bang for your buck. If it’s making millions of dollars, absolutely there’s some great strategies there.

Doug Hoyes:  So start off as a self-employed sole proprietor as it were. So, your advice then as we wrap up this segment is when you’re starting out you want to set the ground work, get everything set up correctly if possible.

Scott Schaefer: Absolutely.

Doug Hoyes:  And be thinking ahead that’s really what you’re saying.

Scott Schaefer: Absolutely.

Doug Hoyes:  That’s why you’re saying do a budget or whatever try to figure out for example what your tax obligations are going to be next year so that you’re able to set aside the money or actually send it to Revenue Canada as you go.

Scott Schaefer: Absolutely. Worst case is you get a refund, which isn’t a bad thing.

Doug Hoyes:  And there’s nothing wrong with that. Excellent well I appreciate that Scott. Some advice on how to be self-employed and how to avoid some of the problems that come up. We’re going to take a break and in the final segment I’m going to ask Ted Michalos to come in here and give us some advice on what to do specifically if you already have a lot of debt, hopefully with the advice we talked about that won’t be an issue but if it is we will talk about that. Thanks very much Scott, you’re listening to Debt Free in 30.

It’s time for the Let’s Get Started segment on Debt Free in 30 and today we’re talking about business issues. What kind of trouble can you get into if you’re self-employed and how do you avoid it? In the first two segments I talked to Ian Martin and Scott Schaefer and one of the issues they raised was that as a self-employed person sometimes, well it’s easy to get behind on your taxes. The first year you’re not making much money, you’re used to be an employee and having the taxes come off every pay cheque. And now all of a sudden, uh oh, it’s time to file my taxes, I haven’t put anything aside and now I’ve got a bunch of tax debts. What can you do if you’re in that situation?

So, the Let’s Get Started segment is where we give some practical advice so I’ve asked Ted Michalos to join me for this segment. So Ted first question have you ever dealt with people are self-employed who get into trouble with taxes and all sorts of other debts?

Ted M:  You mean today or at any time in the past?

Doug Hoyes:  So, this is not an uncommon scenario at all.

Ted M:  Three text messages on the weekend from people that unfortunately I gave my cell phone number to on this very subject.

Doug Hoyes:  So, there you go. So, this is a very common thing and it’s I assume as I described it you just don’t get around to setting the money aside and now you’re into a bigger situation.

Ted M:  That’s right. The tax man isn’t on your shoulder every month saying you got to pay this bill, you got to pay this bill. So, they’re usually the last people to get paid.

Doug Hoyes:  Okay. So, what do I do then? It’s now been a year or two and I’ve got X number of dollars owing on my taxes. Let’s assume I’m a self-employed guy, there’s no corporations or anything but I owe this tax personally. What’s my thought process, where do I start?

Ted M:  Here’s the funny thing about this. Most people once they get behind on their taxes, they become too afraid of the taxman to do anything about it. And that’s probably the worse response that you could have. The longer you let this problem go, the higher the number’s going to be. The interest penalties from the taxman are absolutely obscene. It’s 1% per month for being late. And if you’ve been late for more than a month they double that so it’s 2% per month. That’s like a high interest credit card.

The correct answer is always to recognize okay I’ve got this problem, I’ve got this debt with the government and now let’s do something about it. We need a fresh start so you can move on.

Doug Hoyes:  So, what are the different options that I’ve got then? I guess the first option is to pay them?

Ted M:  Right if you’ve got the money sitting in the bank you can certainly pay them.

Doug Hoyes:  So, if I owe, I don’t know, $20,000 or $30,000 can I go to CRA and say okay look I’ll give you $500 a month for the next two, three, four years and pay you off that way? Will that work?

Ted M:  Yeah so a CRA collector will tell you that yeah you can take 12 months to pay off a debt for any kind of tax arrears. And if they go to their supervisor you can probably get 24 months although they’ll be reluctant to do it. Anything beyond that, and it’s probably not something you can do without some sort of formal procedure, a proposal to creditors is the most obvious solution if you want to make a payment plan. Or perhaps you should be looking at bankruptcy.

Doug Hoyes:  So if I can pay it off in 12 months then I can deal directly with them.

Ted M:  That’s right.

Doug Hoyes:  And so how do I do that? I just phone them up and say here’s what I can do and I’ll send you a bunch of postdated cheques?

Ted M:  Yep, that’s the most common example.

Doug Hoyes:  Okay. And that’s what you would recommend then? I mean obviously you don’t want to be having to do a bankruptcy or consumer proposal if you don’t have to.

Ted M:  If you’ve got the money to pay your debts, you should pay your debts. It’s very simple.

Doug Hoyes:  So, very simple then. So, let’s say I’m in a position now where that’s not physically possible. I can’t pay them off in a year. So, I’ve got two other options that you mentioned. I mean other than going, borrowing from friends and family or something. I mean if you’ve got rich relatives great, that’s what you do then. But if that’s not possible then I’m looking at a bankruptcy or a consumer proposal. A consumer proposal is a deal.

Ted M:  Yeah, where you offer to repay a portion of what you owe.

Doug Hoyes:  And if CRA is the majority creditor they are the ones who are going to decide. What are the chances that they’re going to say yes to a proposal if I’m a self-employed guy?

Ted M:  It’s actually pretty good. The thing that causes CRA the most grief, where they automatically say I’m not going to consider your proposal is if you don’t file your returns. So, if you’re somebody who has gotten behind and then buried your head in the sand you just become so afraid of the fact that you owe taxes that you haven’t filed your last year, your last two years, the last three years. The first thing you’ve got to do is get that stuff filed so they know what it is that you owe them. If you haven’t filed your returns then CRA is not going to agree to any terms of proposal, they’re simply going to say no.

Doug Hoyes:  And as we talked about in the first couple of segments with Scott and Ian, it’s a good idea to get a bookkeeper, somebody who knows how to do it if filing taxes aren’t your thing, so, if your returns are up to date, obviously you owe money, CRA will accept a proposal in a lot of cases if it’s reasonable.

Ted M:  That’s right. And usually their starting position is alright you’ve gone through the process of filing something formal, you’re exercising your legal rights, so they’re looking for as an opening offer, the basic tax.

So, let’s say you haven’t paid your taxes in three or four years and now you owe them 35, $40,000. Probably half of that’s interest in penalties. So if you owe them $40,000, they will say the basic tax is $20,000 and that’s what they’re looking for as an opening offer and proposal. Now most creditors, Canadian banks, credit card companies, financial institutions are looking for more than they get in a bankruptcy or about a third of their debt. And so, as trustees if we were making an offer to CRA we would say alright we’re going to offer a third of the total debt so we’re not – we’ll do the calculation to figure out what the basic tax is. But you’re going to offer them something less than that. So, the basic tax is their opening position, a third of the debt is our opening position and then we usually end up somewhere in between.

Doug Hoyes:  And I guess to close the segment the obvious advice here then is come in to talk to someone who actually understands all these permutations, can help you tell what kind of amounts need to be offered. That’s where you go in. Obviously, it’s better when you can pay them but it’s better if not there are other options, a consumer proposal being one of them.

Great. Thanks very much for being here Ted. That was the Let’s Get Started segment. We’ll be right back to wrap it up here on Debt Free in 30.

Announcer:       You’re listening to Debt Free in 30. Here’s your host Doug Hoyes.

Doug Hoyes:  Welcome back. It’s time for the 30 second recap of what we discussed today. On today’s show we discussed debt problems that can arise from being self-employed or running your own business. Ian Martin explained that the starting point is to be adequately financed. Scott Schaefer discussed why it’s important to crunch the numbers and confirm that your business is generating positive cash flow even after accounting for taxes. Ted Michalos explained the options for dealing with business debt. That’s the 30 second recap of what we discussed today.

So, what’s my take on operating your own business? Well, this is one topic I know a lot about ever since Ted Michalos and I started Hoyes Michalos & Associates back in 1999. There are some big advantages to being the boss but you are responsible for all aspects of running a business. So, the advice I give everyone who was thinking of going out on their own is to start by getting some professional advice. Unless you have no choice don’t just quit your job and start your own company. Talk to a good accountant and perhaps even a lawyer. Figure out in advance exactly what you need to stay on side with the government and your other creditors.

I’ve personally dealt with hundreds of people who become self-employed but don’t know how to keep the books and a year or two into it they find they’re filing behind on taxes and filing HST returns and then they’re playing catch up. It’s no fun trying to come up with a bunch of money to pay CRA. Do yourself a favour and get your books set up correctly at the start and save yourself a lot of hassle later.

If it’s too late and your business wasn’t as successful as you had hoped and now you have a lot of debt, well again speak to a professional. There may be actions you can take on your own to get back on track. Maybe a consumer proposal or even a business proposal is necessary to deal with your debts. Take action now because business problems don’t usually get better on their own.

The post Self Employed: Dealing with Business Debts appeared first on Hoyes, Michalos & Associates Inc..

Cut Unnecessary Costs

This may be easier said than done, but it is necessary to trim the fat, so to speak. Single out the areas of your business that are money pits and deal with them promptly. Are you paying too much for certain services such as phone systems or office space? Identify elements that are expensive and non-essential; it’s a great way to start attacking your debt issues head-on.

Take Care of Cash Flow

A very common problem for small businesses is a lack of diligence when it comes to cash flow management. When business is booming, cash flow may not be much of an issue. But when keeping your small business afloat while dealing with debt, this becomes a very high priority.

Improper cash flow management is dangerous because it can become a vicious cycle. Particularly in industries with a longer operational cycle (average time it takes from receipt of inventory or services to final cash realization), sometimes profits from one cycle aren’t sufficient to finance the next cycle. Furthermore, you may not be able to get lenders to finance the cycle as you won’t have the security to support the debt.

This is why effective cash flow management is crucial. There are a few ways to help you achieve this goal and ensure your business survives while you’re dealing with debt:

• Visit a professional: Talk to a bank loan professional and develop a good understanding of what is required in order to obtain a loan for a small business.
• Open a line of credit: A line of credit can be a solid preemptive method that can help you in a cash-flow pinch. Make sure you do this before you run into cash-flow issues; having it as a safeguard can help you fund short-term cash flow problems.
• Have a backup plan: Every small business owner should have other potential sources of capital lined up in order to service debt or battle through economic difficulties. This could include tapping into savings, turning to family (if you want to take that route), or an alternative is peer-to-peer lending.

Prioritize Your Debt Payments

If you can afford to tackle some of your business associated debt, be sure that you pay down the highest-interest debts first. Business debts that are personally guaranteed (your personal assets have been put up as collateral) should also be given high priority.

Get a Business Debt Consolidation Loan

Debt consolidation allows you to consolidate all your small business debts so that you make one payment per month. This is a wise option for dealing with debt as your many debts are consolidated into one. This option carries a few considerable advantages:

• Paying one instead of multiple payments per month allows you to better budget your cash
• Interest rates may be lower than the rate you are currently paying your creditors
• Lower interest rates and extended terms can help you reduce total monthly payments and keep your business afloat during hard times.

File a Consumer Proposal

A consumer proposal is very similar to other debt management plans; you make monthly payments to eventually settle your debt. However, they have two main advantages:

1. Once a majority of your creditors accept the proposal, it becomes legally binding
2. In the majority of cases, you only repay a portion of your debts as opposed to the entire amount

Sound too good to be true? There are some caveats. First, you have to actually be able to make the payments each month. Second, a consumer proposal works only for unsecured debts like credit cards, bank loans and lines of credit. And finally, a majority of your creditors must accept your proposal (it works on a dollar per vote basis, so your larger creditors will have greater power to accept or reject your proposal).

Firms like Hoyes Michalos can help you deal with your small business debt head-on. We have been helping Ontario residents get out of debt since 1999, and we offer a wide variety of expert debt solutions.

If you need more information on how to keep your small business afloat while dealing with debt, don’t hesitate to contact us today!

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The Self-Employed Cash Flow Crunch

Debt problems for self-employed contractors do happen. A job can cost more than expected, customers might not pay on time or at all. There may be longer periods without contracts, weather delays, start-up costs, and many other reasons why cash flow becomes a problem. Not being able to work due when you can’t get a clearance certificate will only escalate the cash crisis. In addition, if the individual is not able to pay the WSIB premium then they are likely carrying other debts as well like HST, credit cards and bank loans.

Effects of Bankruptcy or A Proposal on WSIB Debts

Can WSIB be included in a personal bankruptcy or a consumer proposal? The answer is yes. A representative from WSIB advised me this month that their current policy is that a new WSIB account number will be issued after a bankruptcy but the same account number will be maintained for someone in a consumer proposal. For a proposal, WSIB allocates the arrears to a sub account so that the account appears to be started at zero.

If you are a contactor and are struggling with your debts (including WSIB premiums) then maybe a consumer proposal or personal bankruptcy will help. A few key points to consider:

• WSIB filing and reporting will have to be up to date
• You will want to ensure you are able to get your HST and personal tax returns filed, and
• You will want to review your business and projected cash-flow to ensure your future business venture will be successful and able to stay current with your future WSIB and tax remittances

If you are experiencing debt problems in your small business, please contact us to talk with a bankruptcy trustee who, as a restructuring professional, can to review your situation and make a plan to deal with your business and personal debts so that you can create that fresh start you need for your business and personal life.

The post WSIB Debts, Clearance Numbers & Bankruptcy or Proposal appeared first on Hoyes, Michalos & Associates Inc..