Professional corporations are owned and operated by one or more members of the same profession. Certain professions permit their members to operate through professional corporations, such as accountants, architects, dentists, engineers, lawyers, physicians, social workers and veterinarians. However, the services provided by the professional corporation are generally restricted to the practice of that profession. Physicians are limited to providing medical services to their patients, while lawyers are limited to providing legal services to their clients.
Advantages of Professional Corporations
A corporation is considered a separate legal entity. Incorporating provides certain benefits, including limited liability, tax incentives and flexibility in remuneration.
Limited liability means that the shareholders in the corporation are shielded from personal liability. In the event of any commercial disputes, debts or liabilities, those will be against the corporation only. However, professionals cannot shield themselves from professional liability for negligence or malpractice by incorporating and continue to remain jointly and severally liable.
Incorporating also provides tax benefits by paying a lower corporate tax rate rather than a personal income tax rate. Professional corporations may be eligible for the “Small Business Deduction” (SBD), which effectively lowers corporate income tax rates on active business income up to a maximum of $500,000. Additionally, professionals who are permitted to sell their practices are entitled to the "Lifetime Capital Gains Exemption" (LCGE) and receive the first $892,218 tax-free as of 2021.
Finally, another advantage of incorporation is the flexibility in remuneration with the ability of shareholders to pay themselves through a salary or dividends.
Professional corporations must comply with both the Ontario Business Corporations Act (OBCA), as well as their professional governing bodies to ensure that they do not violate or circumvent the professional codes of conduct. This includes requirements surrounding the name you choose for your professional corporation and ensuring that only members of the same profession be officers and directors. Certain professions also have specific rules as to who can hold shares in the professional corporations, including whether the shares can be held by a holding company, family member or family trust. For instance, physicians and dentists are entitled to grant non-voting shares to family members allowing for income splitting opportunities by paying dividends.
Incorporating a professional corporation in Ontario may be completed online through a third-party service provider. After the incorporation process is completed online, the certificate and articles of incorporation will be issued almost instantaneously.
Application for Certificate of Authorization
Before practicing or providing services through a professional corporation, professionals are required to obtain authorization from their professional governing bodies. Professionals must prepare and file an application with their governing body to obtain what is known as a “Certificate of Authorization.” The materials submitted include an application form, a copy of the certificate and articles of incorporation, a signed declaration by the applicant and an application fee. The application fee varies by profession but typically averages $400.
Corporations are subject and required to maintain certain corporate formalities, which include annual shareholder meetings and corporate records concerning changes to the board of directors and headquarter locations. Generally, professional corporations must be renewed annually with their respective governing bodies in order to remain valid.
Corporate minute books must also be maintained regularly to reflect corporate changes. Ranieri Law provides clients with the option of preparing and maintaining corporate documents electronically, which may be sent as an e-minute book unless clients opt for a physical minute book.
Disadvantages of Professional Corporations
Clients often ask if there are any disadvantages to operating and providing services through a professional corporation rather than as a sole proprietor. The following includes just a few considerations to keep in mind before setting up a professional corporation.
As with any business, there will be initial start-up fees and expenses, including costs to incorporate, legal and accounting fees. There will also be ongoing maintenance of the professional corporation, as well as respective renewal fees. This includes holding annual shareholder meetings and maintaining corporate minute books, as previously mentioned above. If there are any changes to the structure of the corporation, articles of amendment must be filed. These tasks can be tedious and complex for some and costs can add up. Incorporating ultimately depends on your current situation.
Ranieri Law helps professionals in setting up their practices and guides them through the incorporation process through to annual maintenance and corporate governance. This includes updating corporate minute books, as well as annual renewals with your professional governing body. For more information on professional corporations, Ranieri Law provides complimentary initial consultations.
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