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Understanding Your Personal Earning Potential When You are Starting a Small Business

BC is a province that is ripe with potential for small business owners to build their companies and their future. There have been numerous studies and articles referencing the strength of the small business community in our province. In my years of working with small business owners in BC, I’ve noticed the large discrepancy between your take-home pay as an employee and what you can expect to earn as a small business owner.


When you are trying to plan for your future, it is imperative to consider your financial well-being and earning potential, both in the short term and in the long term. How can you know how much to invest in real estate, stock portfolios or ancillary spending if you do not know how much your earning potential will be?

If you are considering starting your own small business, evaluating your earning potential’s realities is not only a smart business decision; it is a crucial life-planning decision.

At Modi Accounting and Tax, we help prospective business owners thoroughly evaluate their business potential and not only assist them in deciding if starting a business is the right decision but help them map out a plan for financial success.

What is the earning potential of owning your own business?

It is no secret that you might struggle with consistent client acquisition and cash flow in the early days of your small business. The average new small business takes 3 – 5 years to “get off the ground,” and often, entrepreneurs work for “free” for the first 1 – 2 years before they begin to take home a regular paycheque. While there are certainly some start-ups that do well right out of the gate (such as restaurants or other franchises), your household income might fluctuate from where it was before you started your small business. As an individual, the best way to balance this out in both the short and long term is through tax deductions.

The tax benefits of being a small business owner are much higher than that of an employee. Income tax is the single largest expenditure a person will make in their life (even more than your home!). When a business earns $100 in income, it pays roughly $11 in tax and keeps 89 dollars to reinvest into the company or payout as dividends.

When an employee earns $100, they pay approximately $35 in tax and save $65 to invest (please note, numerous assumptions are made here). As you can see, a business’s after-tax profits are much more significant, $24 in the example above, than the after-tax earnings for employees. As you build your business, bear in mind that a smart small business accountant will help you understand all the tax deductions available to you as a small business owner, as well as how to take advantage of those after-tax profits.

But we haven’t even gotten to the best part yet. In addition to receiving better tax rates throughout your earning years, when it’s time to retire, you can sell your small business.

When an employee retires, they typically get nothing extra from the company. They stop working. The cash injection from a small business sale in the later years of one’s life can prove very beneficial in funding an enjoyable retirement. Furthermore, suppose you sell a Canadian small business. In that case, you can receive up to $866,912 tax-free (note: there are many restrictions on what qualifies, ensure you seek a qualified small business accountant).

In my opinion, this is the single best tax deduction available to Canadians; you should take advantage of it! Keeping accurate, detailed financial records is critical for future sales potential.

At Modi Accounting, we are happy to help you map out a record-keeping plan that, if kept up to date, will save you hours of work and headaches if you choose to sell your business at some point in time.

So, what should you do with those after-tax profits?

To maximize your income’s growth potential, we recommend flipping that income to a secondary venture and allowing it to grow alongside your business, increasing your cash flow and earning potential. Feel free to connect with us at Modi Accounting to talk about what those new ventures could be and whether taking a passive or active role is best for you.