A professional corporation is a corporation that provides professional services and that is regulated by a governing professional body such as the Law Society of Upper Canada or the College of Physicians and Surgeons of Ontario.
Basically, if you are a professional and you are planning on offering your services through a company, you will need to set up a professional corporation.
Generally only those professions that are governed by a professional body or association will be allowed to incorporate. These typically include physicians, dentists, veterinarians, lawyers, accountants, engineers and architects. The rules will differ slightly across provinces, so it’s a good idea to check with your accountant or legal advisor before you go ahead.
In Ontario for example, social workers and certain regulated health professionals can also incorporate which may not be the case for other provinces.
The tax reasons for setting up a professional corporation are similar to why many businesses will want to incorporate.
The main income tax advantages of a professional incorporation are:
Taking advantage of the difference in tax rates between the highest personal tax rate of approx. 46% and the more favourable small business corporate tax rate of approx. 16%.
By taking out less than the full amount of corporate earnings, you can defer the tax paid to a later date when you’re in a lower tax bracket.
Issuing salary or dividends to family members in lower tax brackets to reduce your overall tax liability.
Instead of taking out $150,000 in salary by yourself and paying tax at the highest personal rate, you may be able to split the amount between your spouse and children which will significantly reduce your tax bill.
Taking out a portion of your income from the company as dividends and paying less tax on your earnings due to favourable tax rates on dividends.
Keep in mind that a main differentiator between a professional corporation and a non-professional corporation is that of liability.
If you incorporate your photography business and you get sued, your liability will be limited to whatever you invested in the company (there are exceptions). Of course if you weren’t incorporated, all your personal assets would be up for grabs.In a professional corporation, the story around liability is a bit different.
If you are a physician and are sued for malpractice, the corporation does not protect you. You’ll have to check the terms of your professional insurance to see just what your liability is.
What the corporation does provide is some protection from creditors if you borrow money, perhaps for the financing of a new office or for some expensive equipment.
One thing’s for sure though, when it comes to malpractice suits, you certainly can’t hide behind the guise of the corporation.
Unlike a non-professional corporation where you typically have the flexibility to elect anyone as a shareholder, a professional corporation is restricted to the rules set out by the governing professional body.
That means who can be on your shareholder list (other than you of course) is a question for your governing body which will differ depending on what professional you’re in and in which province you’re operating.
For example, a physician practising in Ontario may issue non-voting shares to family members. On the other hand, a lawyer practising in Alberta can only issue shares to other active members of the Alberta law society.
Before you incorporate and select your shareholders, make sure you check up on the rules with your governing body.
Before you go ahead and incorporate your practice, it’s a good idea to review the rules for personal service business (PSB).
A PSB is essentially an incorporated employee.
For example, let’s say you’re the in-house legal counsel for Acme Inc. After hearing about the tax benefits of professional corporations from your friends who’ve recently started their own practices, you decide to go ahead and incorporate. You then get into a consulting agreement with Acme Inc. and say that you will now be offering services from Bestlegaladvice Professional Corp.
From the CRA’s point of view, you will be considered to be running a PSB, since without the corporation, you would reasonably be considered an employee of Acme Inc.
This means that you will lose out on the small business deduction and be taxed at the higher general corporate rate of approximately 28%. In addition, you won’t be able to deduct a variety of standard business expenses. Basically, you’ll lose out on some of the major benefits of incorporating in the first place. If you think you’re bordering a PSB scenario, speak to your accountant or legal advisor before you go ahead.
If you think you’re at a good point in your practice to incorporate, take a look at the professional corporation’s checklist – the steps you’ll need to follow to ensure you set up your professional corporation properly.
Still not sure if setting up a professional corporation is right for you or have questions? Shoot me an email at email@example.com and we’ll discuss what’s right for your practice.
 Tax rates will differ slightly depending on the province and year.
Josh is the co-founder and CEO of LiveCA.