For many people in business, incorporation can present significant benefits, particularly with respect to tax savings and protection from personal liability. If you are a medical professional, such as a physician or dentist, you can incorporate as a professional corporation, to take advantage of these benefits. However, there are some key differences between a professional corporation and a standard corporation under the Ontario Business Corporations Act. Knowing when might be the right time to incorporate can differ from practice to practice. Below, we will review some key elements of professional corporations as they apply to health professionals and the advantages and disadvantages of incorporation. Of course, when deciding what is best for your practice, we strongly advise speaking with one of our accounting and business advisory professionals to get advice tailored to your specific circumstances.
Professional Corporations vs. Standard Corporations
Before getting into the advantages and disadvantages, let’s deal with what is a professional corporation and its characteristics. A professional corporation is a corporation owned and operated by one or more members of the same profession, such as lawyers or engineers. A health professional corporation is applicable to certain professions within the healthcare industry, including, but not limited to:
- Massage Therapists
In addition to incorporating under the Ontario Business Corporations Act, a health professional corporation must also obtain a permit to carry on professional services under the appropriate governing body of the profession, such as the College of Physicians and Surgeons of Ontario.
There are certain restrictions that apply to a professional corporation that do not apply to a standard corporation, including:
Limited Liability Protection
Incorporation is often a way of shielding the individual owners and operators from personal liability, as the corporation becomes a separate legal entity that can be held liable for debts. However, due to standards of professional liability associated with various professions, the ability to protect against personal liability is restricted in professional corporations. For example, a doctor cannot be shielded from medical malpractice claims if they are part of a professional corporation.
With a standard corporation, shareholders can generally be anyone who is 18 and over, however, shareholders of a professional corporation must all be members of the same regulated profession. One exception of this rule applies to doctors and dentists, who may allow family members to hold non-voting and non-participating shares.
Advantages of a Health Professional Corporation
Taxation & Deferral
One of the primary advantages of all corporations is the lower rate at which corporations are taxed in contrast with individuals. The corporate tax rate on the first $500,000 of annual income is around 12%, whereas individuals can be taxed at a rate as high as 53%. If you incorporate your business, any income that stays within the business (i.e. is not paid to individuals in form of dividends or salary) is taxed at the corporate rate, which can present significant savings. Further, this income can be re-invested into the business, allowing for faster growth.
Income splitting in a professional corporation can be more challenging than a standard corporation due to the limitations placed on who can be named as a shareholder. In many health professional corporations, only those licenced to practice in a given profession can be shareholders. However, there are certain ways to retain some benefits of income splitting with family members. For example, if family members work for the corporation, they can earn a salary commensurate with the work they perform. This is one way to divert income to another individual, lowering each person’s individual tax obligation, while keeping that income within the family.
As mentioned above, there are exceptions to the shareholder restrictions available for physicians and dentists specifically. While the shares do not allow non-professional family members to vote on matters pertaining to the corporation, they are entitled to dividends if they complete at least 20 hours per week of work for the corporation.
Disadvantages of a Health Professional Corporation
There is increased complexity and cost in creating and managing a professional corporation compared to a sole proprietorship. Formal financial statements need to be prepared each year, and the business may be more likely to face financial audits. The shareholders must hold meetings to vote on matters pertaining to the management of the business, which must be properly documented. As well, if the professional corporation loses money in a year, the owner cannot claim it on their personal tax return. Further, while a proprietor can easily withdraw funds from their business for personal use, a professional corporation owner can not do this.
Despite these potential disadvantages, the advantages of a professional corporation for healthcare professionals can far exceed the additional obligations. To find out if incorporation is right for you as a healthcare provider, speak with an experienced accountant today.
Contact McCay Duff LLP in Ottawa for Straightforward and Reliable Advisory and Consulting Services for Health Professionals
If you are a health professional who is considering whether incorporation may be right for your business, McCay Duff LLP is always there for you.
We will learn your objectives and work with you to help you meet them each step of the way. To enjoy the benefits of having experienced business advisors on your side, contact the finance and business professionals at McCay Duff LLP by reaching out online, or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.