What Are Professional Corporations In Ontario?
Professionals in Ontario may have several options when deciding how to structure their practice. For members of certain regulated professions, one option is to practise through a professional corporation.
A professional corporation is a corporation established under Ontario's Business Corporations Act (“OBCA”) that is authorized to practise a regulated profession. Unlike an ordinary business corporation, a professional corporation is subject not only to Ontario corporate law but also to the legislation, regulations, by-laws and professional requirements applicable to the particular profession.
Professional corporations may be available to members of various regulated professions, including certain health professionals, lawyers, paralegals, chartered professional accountants, social workers and social service workers, veterinarians and other professionals where permitted by applicable legislation.
The rules are not identical for every profession. Accordingly, professionals considering incorporation should determine both the corporate requirements under the OBCA and the specific requirements imposed by their applicable regulatory body.
What Is A Professional Corporation?
A professional corporation is a separate corporate entity through which an eligible regulated professional may carry on their professional practice.
Under the OBCA, a professional corporation must satisfy several specific requirements. Subject to profession-specific exceptions, these include requirements relating to:
ownership of the corporation's shares;
the corporation's directors and officers;
the corporation's name; and
restrictions on the business that the corporation may carry on.
A professional corporation's name must generally include the words "Professional Corporation" or "Société Professionnelle" and must comply with any additional naming requirements imposed by the legislation, regulations or by-laws governing the particular profession.
Unlike an ordinary Ontario business corporation, a professional corporation cannot have a number name.
The articles of incorporation must also generally restrict the corporation from carrying on a business other than the practice of the applicable profession. This does not prevent the corporation from undertaking activities related or ancillary to the professional practice, including the investment of surplus funds earned by the corporation.
Who Can Own A Professional Corporation?
Share ownership is one of the areas in which professional corporations differ significantly from ordinary business corporations.
As a general rule under the OBCA, the issued and outstanding shares of a professional corporation must be legally and beneficially owned, directly or indirectly, by one or more members of the same profession.
However, profession-specific legislation and regulations may create exceptions or impose additional requirements concerning who may own voting and non-voting shares.
Certain regulated health professions, for example, may permit specified family members to own non-voting shares where the applicable statutory and regulatory requirements are satisfied. Other professions may impose considerably more restrictive ownership requirements.
Similarly, the use of holding corporations, trusts or other ownership structures depends on the rules applicable to the particular profession.
For this reason, a share structure that is appropriate for one type of professional corporation should not automatically be used for another.
Directors & Officers
The OBCA also imposes specific requirements concerning the directors and officers of professional corporations.
Generally, all officers and directors of a professional corporation must also be shareholders of the corporation, subject to any applicable profession-specific rules.
Professionals should therefore determine the appropriate ownership and governance structure before the articles of incorporation are filed, particularly where multiple professionals will practise through the corporation or a more complex share structure is contemplated.
Advantages of A Professional Corporation
There are several reasons why an eligible professional may consider incorporation.
Separate Corporate Entity
A corporation has a legal existence separate from its shareholders. As a result, incorporation may provide protection to shareholders in respect of certain ordinary commercial liabilities and obligations of the corporation, subject to applicable law, contractual guarantees and other exceptions.
However, the liability protection associated with an ordinary corporation must be carefully distinguished from professional liability.
Professional Liability Is Not Eliminated
Incorporation does not allow a professional to avoid liability for professional negligence, errors, omissions or malpractice.
The OBCA expressly provides that practising through a professional corporation does not limit a member's professional liability. The legislation also contains specific provisions concerning the liability of shareholders for professional liability claims against the corporation.
Accordingly, a professional corporation should never be viewed as a mechanism for eliminating professional responsibility or professional liability.
Professionals must also continue to comply with applicable professional liability insurance requirements imposed by their governing bodies.
Potential Tax & Financial Planning Benefits
Depending on the circumstances, practising through a professional corporation may provide tax and financial-planning opportunities.
For example, a qualifying professional corporation may potentially benefit from the small business deduction on eligible active business income, subject to the requirements and limitations contained in applicable tax legislation.
Incorporation may also provide flexibility regarding the timing and manner in which funds are withdrawn from the corporation. Depending on the circumstances, a professional may receive remuneration through salary, dividends or a combination of the two.
However, incorporation does not automatically result in tax savings.
Tax consequences depend on numerous factors, including the professional's income, personal cash-flow requirements, other associated corporations, share ownership, remuneration strategy and applicable tax rules. Certain tax benefits may also be restricted by legislation.
Professionals should therefore obtain advice from a qualified accountant or tax professional before incorporating or implementing a particular remuneration or ownership structure.
The Incorporation Process
Establishing a professional corporation involves more than simply filing articles of incorporation.
The corporation must first be properly structured under the OBCA, while also satisfying the requirements imposed by the legislation and regulatory body governing the profession.
Among other matters, consideration should be given to:
the proposed corporate name;
the classes of shares to be authorized;
who may legally and beneficially own those shares;
voting and non-voting rights;
directors and officers;
restrictions on the corporation's business; and
any profession-specific requirements applicable to the articles.
The articles of incorporation can then be filed electronically through Ontario's corporate filing system.
Once incorporated, the corporation should also be properly organized. This generally involves preparing the corporation's organizational resolutions, by-laws, securities register, director and officer registers, share issuances and other applicable corporate records.
Certificate of Authorization & Regulatory Approval
Incorporation alone does not necessarily authorize a professional to begin practising through the corporation.
Depending on the profession, the professional corporation may be required to obtain a Certificate of Authorization or other approval from its professional regulatory body before providing professional services through the corporation. The requirements vary by profession.
For example, Ontario lawyers and paralegals who wish to practise or provide legal services through a professional corporation must obtain a Certificate of Authorization from the Law Society of Ontario (LSO). Certain regulated health professionals are similarly required to obtain authorization from their respective regulatory Colleges.
Application requirements, supporting documentation, fees and processing procedures vary among regulatory bodies and may change from time to time.
Professionals should therefore confirm the requirements of their own governing body before beginning to practise through a newly incorporated professional corporation.
Corporate Records & Ongoing Compliance
Professional corporations have ongoing corporate compliance obligations just like other Ontario corporations. These may include:
maintaining an up-to-date corporate minute book;
maintaining required corporate registers and records;
documenting annual corporate proceedings;
recording changes involving directors, officers and shareholders;
filing required notices, articles and annual returns in Ontario;
maintaining current beneficial ownership information where applicable; and
complying with other requirements under the OBCA.
A corporation's minute book should accurately reflect its corporate history and current ownership and governance structure.
Ranieri Law offers clients the option of maintaining their corporate records electronically through a digital minute book.
Professional Regulatory Compliance
Professional corporations may also have separate ongoing obligations to their professional regulatory bodies.
These obligations vary considerably by profession and may include annual renewal of a Certificate of Authorization, payment of regulatory fees, notification of changes to shareholders or corporate information, and continued compliance with applicable ownership and governance requirements.
For example, professional corporations authorized by the Law Society of Ontario (LSO) must renew their Certificates of Authorization annually in accordance with the Law Society's requirements.
Professionals should therefore distinguish between:
the corporation's obligations under Ontario corporate law; and
the corporation's separate obligations to its professional regulator.
Compliance with one does not necessarily satisfy the other.
Are There Disadvantages To Incorporating?
A professional corporation is not necessarily the appropriate structure for every professional.
Incorporation involves additional costs and administrative responsibilities. These may include:
legal fees associated with incorporation and organization;
accounting and tax preparation costs;
regulatory application and renewal fees;
annual corporate maintenance;
corporate tax returns;
maintenance of corporate records and minute books; and
legal and accounting costs associated with future corporate changes.
The professional must also ensure that the corporation continues to satisfy the requirements of both the OBCA and the applicable professional regulator.
There may also be circumstances in which the potential tax or financial benefits of incorporation do not justify the additional costs and administrative requirements.
Whether incorporation is appropriate therefore depends on the professional's individual circumstances, practice, income, future plans and professional regulatory requirements.
Should You Incorporate Your Professional Practice?
The decision to incorporate should be made after considering both the legal structure of the practice and its tax and financial implications.
Before incorporating, professionals should consider questions such as:
Does my profession permit me to practise through a professional corporation?
Who will own the corporation?
What share structure is appropriate and permitted?
Will other professionals eventually join the practice?
What restrictions does my professional regulator impose?
Is regulatory authorization required before the corporation begins practising?
What are the ongoing corporate and regulatory compliance requirements?
Does incorporation make sense from a tax and financial perspective?
Legal and accounting advice should ideally be coordinated before the professional corporation is established, particularly where a more sophisticated ownership or tax-planning structure is contemplated.
Conclusion
Professional corporations can provide Ontario professionals with a useful structure through which to operate their practices, but they are subject to requirements that do not apply to ordinary business corporations.
Properly establishing a professional corporation requires consideration of the OBCA, the legislation and rules governing the particular profession, corporate governance requirements and the professional's individual circumstances.
Ranieri Law assists regulated professionals with the incorporation and organization of professional corporations, applications for Certificates of Authorization where applicable, corporate governance, minute books, annual corporate maintenance and other corporate and commercial matters.
For more information about establishing or maintaining a professional corporation in Ontario, contact Ranieri Law to schedule a complimentary initial consultation.
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