We have written before about the benefits and drawbacks of incorporating versus doing business as a sole practitioner. But in certain industries, the choice is not quite as simple as that. For specific professionals operating in regulated industries, such as doctors, dentists, veterinarians, lawyers, architects, engineers and accountants, incorporation can only be accomplished through a specific vehicle called the “professional corporation” which is subject to its own set of rules and regulations.
This article explains what you should consider if you are thinking about incorporating your practice as a professional corporation.
The benefits of incorporating into a professional corporation are similar to those related to incorporating in a regular corporation, with some important differences. From a tax perspective, some of the key benefits are the following:
- Income Splitting. Although this benefit has been limited by recent reforms, practitioners in professional corporations can still split their earnings among family members that are active participants in the business. Taking advantage of lower marginal tax rates where possible.
- Lower tax rate. As with all corporations up to a certain threshold ($500,000 of net income), professional corporations benefit from a much lower tax rate than the individual marginal tax rate a sole practitioner would have to pay.
- Favourable Tax Treatment for Dividends. Paying a portion of one’s earnings by way of dividends instead of salary will reduce the individual’s overall tax burden as dividends are taxed more favourably than salary.
- Capital gains exemption upon sale. If you are able to sell the shares of your professional corporation upon retirement, you could benefit from the lifetime capital gains exemption of up to approximately $850,000.
From a liability perspective, there are also benefits to be derived from a professional corporation, but they are considerably watered-down from a regular corporation. Specifically, professional corporations do not protect their shareholders’ personal assets from being the subject of claims in negligence or malpractice, and shareholders remain jointly and severally liable for all professional liability claims made against them. That said professional corporations do shield their shareholder from liability for other types of claims, such as from creditors. The reason for this is that professional corporations only apply to industries that already have internal regulations, high standards of professional conduct, and typically mandated insurance for such claims. This quasi-limited liability is something to consider carefully for certain professionals as in many cases opting to practice in a limited liability partnership, such as in a large accounting or law firm may be preferable from a liability perspective.
If you want to incorporate a professional corporation there are certain rules you have to follow. Specifically, (1) all of the shares of the professional corporation must be owned by one or more members of the profession; (2) all officers and directors must also be shareholders; (3) certain naming conventions must be followed, and the name must include the words “Professional Corporation”; (4) the corporation must formally restrict its activities to only the activities of the profession; and (5) any other rules mandated by the profession-specific acts and regulations must also be followed.
If you are considering starting or growing a practicing in one of these regulated professions and want to know what option would work best for you, contact HazloLaw today.
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Hugues today. 613-747-2459 ext.304, [email protected]