If you’re a regulated professional, someone has probably told you to incorporate. Often it’s your accountant, and often the reason is tax.
However, a professional corporation is not simply an ordinary corporation owned by a professional. It is a specific type of corporation governed by additional rules and restrictions, and there are important misconceptions about the protection it provides.
For many professionals, a professional corporation can offer significant tax-planning and business advantages. At the same time, it is important to understand what incorporation does and does not accomplish before deciding whether it is the right structure for your practice.
What is a professional corporation?
A professional corporation is a corporation established for the purpose of carrying on a regulated profession.
Unlike an ordinary business corporation, a professional corporation is generally restricted to practising the profession for which it was established and activities related to that practice. It may hold investments and manage surplus funds, but it cannot be used to carry on unrelated business activities.
It must also be approved by the profession’s governing body, such as your college or law society. Incorporating on its own is not enough. A corporation only becomes a professional corporation once it receives a certificate of authorization (or similar approval) from that body.
Who can have one
In Ontario, the ability to incorporate is determined by each profession’s governing legislation. Professional corporations are commonly used by physicians, dentists, lawyers, paralegals, accountants, veterinarians, and many other regulated health professionals.
The rules on who can own and run a professional corporation vary by profession, but they are stricter than for an ordinary corporation. The corporation must be set up under Ontario’s Business Corporations Act (the provincial law that governs most Ontario companies) and approved by your regulator. Generally, only members of the profession can own shares, whether in their own name or through someone else, and only members can serve as directors and officers. Physicians and dentists are a limited exception: certain family members may own non-voting shares.
Professional liability
One of the most common misconceptions about professional corporations is that they protect professionals from malpractice claims. They do not. Incorporating does not protect you from your own professional negligence.
Normally, the owners of a corporation (its shareholders) aren’t personally responsible for the corporation’s debts. That protection does not cover a professional’s own mistakes. If a patient, client, or customer sues you over how you practised, the corporation doesn’t stand between you and that claim. You remain personally responsible for your own professional work. In addition, unless your profession’s rules say otherwise, if a claim is made against the corporation for professional mistakes, each shareholder can be held personally responsible for the full amount alongside the corporation. Some professions change this rule, so it is worth confirming how it applies to yours before you incorporate.
This responsibility covers anything that happened while you were a shareholder. Selling your shares or leaving the practice doesn’t end your responsibility for claims about work done during that time.
This is not a reason to avoid incorporation. It’s a reason not to treat incorporation as a substitute for good practice and proper professional liability coverage. The corporate structure was never designed to shield you from your own professional conduct.
What it does help with
So why do professionals incorporate? Because the benefits can be significant. They lie in tax planning, business operations, and long-term planning.
- Tax deferral. Most professional corporations qualify for the small business deduction, which means a lower corporate tax rate on the first $500,000 of business income each year. If you don’t need to take all your earnings out personally, leaving money in the corporation lets you put off paying personal tax until you withdraw it. For a professional earning well above their living costs, that can add up over time. Keep in mind that the $500,000 limit must be shared with any related corporations, and it shrinks once the corporation earns more than $50,000 a year from investments.
- Income timing. A professional corporation gives you flexibility in when and how you pay yourself, whether through salary, bonus, dividends, or a mix. That creates planning options that aren’t available if you aren’t incorporated. However, special tax rules (known as the “tax on split income” or TOSI rules) greatly limit the tax benefit of paying dividends to family members, so speak with your accountant before doing so.
- Estate and succession planning. Holding your practice through a corporation can make it easier to plan how the value of the business passes on, and to structure that transition deliberately rather than leaving it to chance.
- Ordinary business liability. The corporation does protect you personally from the practice’s everyday business debts, such as a commercial lease, a bank loan, or an equipment contract, as long as you haven’t personally guaranteed them. It’s your professional liability that stays personal, not your office lease. Keep in mind that directors can still be personally responsible for certain amounts the law requires the business to pay, including unpaid employee wages, income tax and other amounts withheld from employees’ pay, and HST.
What you have to keep up
A professional corporation comes with ongoing obligations on two tracks: the corporate side and the professional side.
On the corporate side, you file an initial return with the province shortly after incorporating and an annual return each year, and you keep the corporation’s official records (its “minute book” and registers of shareholders and directors) up to date. On the professional side, you keep your certificate of authorization current and follow your regulator’s rules, including the naming requirements. A professional corporation’s name must include the words “Professional Corporation” or “société professionnelle” and follow your college’s or society’s rules.
None of these requirements are particularly burdensome, but they do require ongoing attention. Letting the corporate or professional filings slide can create problems that are far more costly to fix than to prevent.
If you’re a professional weighing whether to incorporate, the right answer depends on your income, your goals, and how you want to plan for the future.
I’m happy to walk through your situation, explain what a professional corporation would and wouldn’t do for you, and help you set it up properly if it makes sense.