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Assisting entrepreneurs in achieving true earning potential! A professional corporation provides professional services where a member of a profession governed by its professional body allows its members to practice through a corporation instead of a sole proprietorship or partnership. Each professional governing body has its own set of rules requiring certain formalities to be followed.
Business Activities Which can be Undertaken
The professional corporation may not carry on a business other than the practice of the profession; however, this shall not be construed to prevent the corporation from carrying on activities that are related to, or ancillary to, the practice of the profession, including the temporary investment of surplus funds earned by the corporation.
Ownership Restrictions for Professional Corporations
The professional incorporation legislation allows one or more members of the same profession to be shareholders in a professional corporation. All officers and directors of the professional corporation are required to be shareholders of the corporation.
Naming a Professional Corporation
The name of the professional corporation must include the words 'Professional Corporation' or 'Société Professionnelle' and cannot be a number name.
Role of Professional Governing Bodies
The governing bodies of regulated professions will be responsible for the certification or licensing of professional corporations that fall under their jurisdiction. In addition, the governing bodies will be able to "look through" professional corporations and hold the professional shareholders accountable for their actions.
Ensuring Professional Liability Not Limited by Incorporation
In general, incorporating protects shareholders in their personal capacities from corporate liability. The professional corporation provisions ensure that personal professional liability of those professionals who choose to operate their practices through a professional corporation will not be limited.
Incorporating Your Business
Formation & Operation
A professional corporation resembles a business corporation, requiring compliance with corporate law and the rules and regulations of professional licensing bodies. A professional corporation is formed in the same manner as a business corporation, except that it typically has one or several of the following additional limitations, depending on the jurisdiction:
- All shares of stock of the corporation (or a minimum percentage) must be owned and held by individuals licensed in the profession of the corporation.
- At least one incorporator must be licensed in the profession.
- At least one director (or a majority, or even exclusively) must be licensed in the profession.
- The articles of incorporation, in addition to all other requirements, must limit the activities of the corporation to the profession.
- The professional corporation may be required to obtain from the appropriate professional body a certification that the shares of stock are owned by individuals who are duly licensed in the profession.
- Professional corporations are typically required to use the name of the professional as part of the corporate name. They are also required to have the words "Professional Corporation" as part of its legal name.
Also, the professional corporation may be required to obtain a certificate of registration from the professional body finding that no disciplinary action is pending before the professional body against any of the licensed directors, shareholders, or employees of the corporation. The certificate of registration may be required to be renewed as often as required by law or by the regulations of the professional body. Professional corporations may be subject to additional limitations and regulations imposed by their respective professional bodies.
Period of Existence
A professional corporation has a less stable business life than a business corporation due to the dependence on its members. For example: The death or disqualification of a shareholder or employee may result in the dissolution of the corporation.
Benefits & Opportunities
Lower Tax Rates on Active Business Income
Professionals now have the ability to incorporate their practices and have them taxed at the lower small business rate (approximately 15% in Ontario).
Tax Savings & Tax Deferral
In an unincorporated sole proprietorship, all of a professional’s income (whether or not received) is taxed in the year earned (billed). There are two major consequences to this. First, income earned but not collected (think of year end billings) is included in income for the year, and taxed (presumably at top marginal rates) even though the bills may not be collected for months (or ever). Second, even though the professional may not require all of the income he or she earns in a given year, he or she must recognize for tax purposes and pay tax, typically at the highest marginal rate, on income which really should be saved.
Use of a professional corporation alleviates the first problem and largely resolves the second. By using a professional corporation, the professional can pay himself or herself a salary or dividends to cover required living expenses, and leave the balance of the funds in the professional corporations where it is only subject to the lower rate of tax.
As part of its strategy to buy peace in the health-care sector, the Ontario government allowed certain health professionals not only to incorporate but to introduce family members as shareholders so that income could be "split" among the family. This creates a wonderful opportunity for health-care practitioners to reduce the after-tax cost of high personal expenses, such as children with university expenses or other high demands for cash, or health and living expenses for aging or infirm parents or other family members. It is also a wonderful tool for professionals seeking to take a sabbatical from their practice, whether that sabbatical is a maternity or parental leave or a less stressful respite.
In all of these situations, expenses can be funded with dividends to spouses or family members out of corporate after-tax dollars, rather than out of personal after-tax dollars. While it has always been possible to pay spouses and family members a salary to split professional income, that approach faces two practical hurdles. First, the spouse and family members must actually provide services. Second, their compensation must be reasonable in light of the services actually provided. There are no such restrictions on the payment of dividends. Directors are entitled to declare and pay dividends as they wish to shareholders who are entirely passive.
Opportunities Created By Incorporating
- The first $500,000 of active business income attracts the small business deduction (SBD). The sharing of a SBD may yield little advantage for associated companies or large partnerships. Sole practitioners' corporations and small firms retaining after-tax funds benefit the most.
- Tax instalments are not paid in the first year, thus improving cash flow.
- Accrued bonuses are deductible if paid within 179 days of year-end. Years ending September to December can bonus income to next tax year and reap additional deferral.
- Remuneration may be salary or dividends. Only a professional (except the health care sector – see above) may be a shareholder or director (architects need hold only a majority of each class of shares or directorships); others cannot income-split via dividends or directors' fees, but may be employees and receive reasonable salaries.
- The corporation can expense more than two conventions, own group sickness and income maintenance policies and life insurance, set up a scholarship plan for employees' children, and contribute a retirement compensation arrangement (and withdraw funds when tax rates are lower).
- The $750,000 capital gains exemption may be claimed on sale or death (if there is no spousal rollover). The deemed disposition of shares, not assets, facilitates estate administration. A $10,000 death benefit is deductible if paid to the surviving spouse, to whom it is not taxable.
- Limited liability exists except for professional malpractice (for example, a lease, a non-guaranteed bank loan, and trade payables). A professional's loans to the corporation can be secured.
Who Can Incorporate?
Members of the following professions are able to operate a professional corporation:
- Healthcare Practitioners: Audiologists, chiropodists including podiatrists, chiropractors, dental hygienists, dental surgeons, dental technologists, denturists, dieticians, massage therapists, medical laboratory technologists, medical radiation technologists, midwives, nurses, occupational therapists, opticians, optometrists, pharmacists, physicians and surgeons, physiotherapists, psychologists, speech language pathologists, and respiratory therapists under the Regulated Health Professions Act (responsibility of the Ministry of Health and Long-Term Care).
- Lawyers under the Law Society Act (responsibility of the Ministry of the Attorney General).
- Social workers and social service workers under the Social Work and Social Service Work Act (responsibility of the Ministry of Community and Social Services).
- Veterinarians under the Veterinarians Act (responsibility of the Ministry of Agriculture, Food and Rural Affairs).
Physicians & Dentists
The importance of incorporating is especially significant for those in the medical and dental professions. Currently, the spouses of doctors and dentists can subscribe to the shares of the professional corporation which would enable the successful application of income splitting.
As there is no limit on the amount of income that can be distributed through dividends, this income splitting is extremely advantageous as the medical and dental professionals can now split their income with their spouses resulting in less tax, thus increasing overall net cash flow. For example, as a result of incorporating and income splitting through dividends, the tax savings are approximately $32,000 on $250,000 of income, based on the dividends being split 50/50 between the spouses.