This was the year that I started getting extra serious about my business and have been trying to grow it into something spectacular. Part of that exercise has involved me formalizing my business by incorporating and by getting a bookkeeper to help me make the most of my financial situation. Both exercises have worked well and I couldn’t have done it without the help of my amazing bookkeeper, Sandi McGill. Before I jump into the interview, I want to talk a bit about why I decided to stop doing my own books and why I decided to hire Sandi.

Before meeting Sandi socially, I wasn’t convinced that I needed a bookkeeper or that I needed to incorporate my business. After telling her how much income tax I paid last year (yikes!) it became clear that the time had come for me to incorporate. Incorporated companies, under the tutelage of an experienced bookkeeper, can reduce their taxes by a huge margin. Sandi had helped several other companies with their incorporation paperwork and I asked her to help me with mine.

Now that Sandi’s got me more off to a good start, she’s taking over the bookkeeping and is going to do my tax preparation for me this year. Part of growing as a business owner is knowing when to delegate to specialists and I have a lot of confidence in Sandi’s abilities. That and to be frank, it’s cheaper for her to do the books than for me to do it instead of generating billable hours. I’ve already referred her to several colleagues of mine and she’s still got room for more clients so if you’re in the Lower Mainland and need a good bookkeeper, check her out. [LINK] McGill Bookkeeping and Tax Services – bookkeeping and income tax preparation for businesses of all sizes.

Without further ado, here’s my interview with Sandi McGill:

Aaron: There are some tax advantages to incorporating over sole proprietorship, right? What are they?

Sandi: Yes there are definitely advantages to incorporating. Incorporating your company creates a separate legal entity. It keeps your personal finances and your business finances completely separate which is good when you are looking to borrow money.

There are also tax advantages to incorporating. A sole proprietor must declare all business income from January 1st to December 31st, on that year’s personal tax return. With incorporating even a one person small business can stagger the year end to allow for better tax planning. For example, if the corporation’s year end is January 31st but the personal tax return covers from January 1st to December 31st. By not declaring management/director salaries or shareholder dividends until sometime in January, the shareholder/tax payer can defer the business income to the next tax year or split the payment of income from the corporation to the shareholder/director in order to lower personal taxes payable.

Another tax advantage to incorporating is that the business owner (shareholder) can pay themselves in Director’s salary, dividends or a combination of both to lower personal income taxes payable but still show personal income. By paying dividends to the owner/shareholder the corporation also shows income. This helps both the individual and the corporation when looking to borrow money. Lastly, corporations pay a lower rate of tax on income, especially corporations with annual income under the small business reduction amount. For 2008, the small business reduction amount was $400,000.

Aaron: How much extra paperwork is involved? Can a bookkeeper help manage that extra paperwork?

Sandi: There is definitely some extra paperwork. First there is the actual incorporating. This involves an incorporation application and the adoption of a set of Articles of Incorporation. A standard set which is fine for most small businesses can be found on the BC OneStop Business Registry site [LINK]. There is a cost to incorporation of about $350 that is paid to the Government of BC when you file your Incorporation Application. Secondly, there is the Corporate Tax Return (T2). This can be found on the CRA website [LINK] or you can have a professional bookkeeper or an accountant prepare it for you. I recommend having it prepared by a professional as this is a rather lengthy return with many schedules and it can be a bit confusing. Although you can pay an accountant to do all this, a knowledgeable bookkeeper can help you at a much lower cost.

Aaron: What is the advantage of having a bookkeeper over doing your own books?

Sandi: The first advantage is that if you have a good bookkeeper they will better understand what you can and cannot deduct as a business expense. The Income Tax Act in Canada is a very large and confusing publication which is open to interpretation. There are many grey areas and a bookkeeper can help with that. Secondly, having a bookkeeper do your books leaves you free to build your business and earn money. This holds true whether you are a sole proprietor, a partnership or a corporation. A good bookkeeper can probably do your books in less time than you can because this is their field of expertise.

Keep in mind that if you take your books to an accountant, they actually have a bookkeeper do the books and they just review it. You may at some point have to have your books audited by an accountant but why pay the accountant’s rate to have your books prepared? It makes more sense financially to have a good bookkeeper and use the services of an accountant only when necessary.

Aaron: What should someone look for in a good bookkeeper?

Sandi: Well for starters you definitely want one that is knowledgeable but also not afraid to tell you they don’t know the answer to your question (remember Tax Act is HUGE and confusing) but will research it and get back to you. It is impossible for any bookkeeper or accountant to know it all!

Secondly, you want a bookkeeper that is accessible. Not 24/7 but at least returns your calls in a timely manner.

Lastly, I think it’s important that you find a bookkeeper that communicates well with you. Your bookkeeper should explain things you don’t understand but nicely. You definitely don’t want one that talks down to you. Ultimately, you need to understand what is going on in your company and on your tax returns. A good bookkeeper will provide you with monthly income statements and balance sheets once your paperwork is entered into the bookkeeping software.

Aaron: How many hours per month does a good bookkeeper need to spend on a company’s books? What does it cost?

Sandi: Well honestly that depends on the size of the business, how much paperwork and the state of the paperwork when it is given to the bookkeeper. Handing your bookkeeper a bunch of balled up receipts is going to cost more than if you have your paperwork a bit organized. Remember you are paying your bookkeeper the same rate to sort and file as you are to have them do your books. On average you are looking at between $50 to $150 per month plus about $25 per quarter per government sales tax and payroll filings. Annual tax returns can run from $100 to $150 for a sole proprietor and $400 for most small corporations.

Aaron: What’s the biggest mistake people make when they try to do their own books and taxes?

Sandi: They pay too much in income tax! Most people don’t take all the deductions that they are entitled to or they claim expenses that are not valid business expenses. Either of these mistakes cost you money, either by paying too much tax or by having to pay penalties and interest if you are caught making false deductions by CRA.