Professional Corporations: What Are They and Why Use Them?
Professional corporations are held and operated by one or more members of the same profession and allow professionals to provide their specialized services through a separate entity rather than in a personal capacity. These professionals, including physicians, realtors, accountants, lawyers, dentists, veterinarians and massage therapists, are regulated by their respective colleges and regulating bodies, which place a number of requirements and restrictions on their members to ensure compliance with the professional codes of conduct and practice rules. Requirements include, but are not limited to the following:
Provided services are usually limited to the practice of the profession. While some “ancillary services” are permitted, details of such should be reviewed on a case-to-case basis.
Permits from the regulating body are required before incorporating and usually come with an additional fee.
In most provinces, only members of the profession may hold voting shares.
Certain naming requirements must be met. For example, the name of a professional accounting corporation may not be misleading, not self-laudatory and not contravene professional good taste, while the name of a medical corporation must contain the surname and any combination of the given names or initials of voting shareholders, among other restrictions.
Generally, officers and directors of professional corporations must be shareholders and licensed members of the profession.
Other important considerations to keep in mind are limited liability and dual fees. While regular BC corporations generally limit personal liability, professional corporations do not offer liability protection in cases of professional negligence. Additionally, some regulating bodies may require separate licensing and/or insurance fees for the individual and the professional corporation, which may offset some of tax benefits professional corporations enjoy.
These tax benefits are the most common reason for professionals to incorporate and include the small business deduction, tax deferral, flexible remuneration and the lifetime capital gains exemption.
Small Business Deduction
Canadian controlled private corporations pay reduced corporate taxes on their active business income up to an income limit per year. The federal income limit is currently $500,000.
Income earned within the professional corporation is first taxed at the corporate level and then on the personal level upon pay out. However, personal income tax can be deferred by retaining the income within the corporation, creating significant tax savings.
Through incorporating, professionals also gain the opportunity to distribute income in numerous ways, including salary, dividends, and bonuses. Depending on the size and structure of the corporation, this flexibility in remuneration can provide further tax savings.
Lifetime Capital Gains Exemption
Keeping in mind the restriction by the professional regulating body on voting shareholders, professionals who sell their practice through company shares may further benefit by using their lifetime capital gains exemption for the gains realized upon disposition.
To discuss whether setting up a professional corporation is right for you, please contact us and we will be more than happy to help guide you through the specific advantages, drawbacks, and requirements.