Now that you know that a professional corporation is right for your practice, let’s take a look at what steps you need to take in order to set one up. Most professionals will want to incorporate after running their practice for some time as a sole proprietorship.
Though whether you’ve been operating on your own for a few weeks or a few years, the process will be fairly similar.
So if you’ve decided that setting up a professional corporation is right for your practice, here is a quick checklist of steps to set up a professional corporation:
If you plan on practising in one province only, you’ll likely want to set up a corporation in the province of your practice. If you plan on opening multiple practices across the country, you may want to incorporate federally. There are a number of resources available which make it easy to incorporate online. However, if you’re considering having multiple shareholders or taking advantage of dividend splitting, it’s probably a good idea to speak to a lawyer or accountant before you go ahead just to ensure that you’re setting up the share structure properly.
Get approval from your professional body
In order to begin practising from your corporation, you’ll need approval from your professional governing body. This is really what distinguishes your corporation as being “professional.” Each professional body will have their own requirements so you’ll have to check with them to see what’s required. Generally, you’ll have to send them the details of the company that you incorporated and fill out a form with the shareholder information (sent in with a fee of course). You should be able to easily find this information on your professional body’s website.
Once you’ve got approval from the professional body, you can now legally run your practice from your professional corporation. However, you’re going to want to make sure that your bank and credit cards are now in the name of the corporation, rather than held personally. Speak to your contact at your bank to see what documents they need to switch over the account into the name of the corporation.
Get a GST/HST number for your company
Depending on your profession, you may be charging HST/GST to your clients. If you had an GST/HST number before, you’re going to have to open a new one for your corporation and shut down your old one after your submit your last GST/HST return personally. You can do this easily online through the CRA’s Business Registration Online.
Change over your business paraphernalia
Since you are now a professional corporation, your business cards, letter head, website, etc. should reflect the name change, usually with the terms “professional corporation” at the end of your company name. Review your business paraphernalia to ensure that the new name of your business is appropriately reflected.
Owning a corporation means you’ve got some more responsibility when it comes to record keeping. Reconciling your company bank and credit card accounts and keeping track of your withdrawals and deposits from/to the company are some of the additional tasks you’ll need to start taking care of. The right accounting software will help make the transition much easier.
File a Section 85 Rollover
The words “section 85 rollover” give many people stomach cramps or should at least make you go “huh?” Although it’s this last piece of the puzzle that’s important in making sure you minimize your tax liability when setting up a professional corporation.
A section 85 roll over acts to transfer or rollover any assets that you may have held personally to run the business.
For example, if you purchased office furniture, computers, or equipment before you were incorporated, you may want to transfer these assets to the corporation. The idea behind a rollover is to avoid paying any tax on these assets when you transfer them to the company. Rather than “selling” these assets to the corporation at their fair market value rates, you can avoid this hassle and additional tax liability which may arise by transferring them into the corporation at their adjusted cost basis – basically, at whatever amount they appear on your books currently. This will ensure that you don’t have to pay any capital gains taxes on the transfer.
In addition to tangible assets such as furniture and computers, it’s a good idea to rollover “goodwill” into the corporation for a nominal amount. What does this mean exactly?
Suppose you’re a dentist and after one year of business have managed to rack up a nice client list. When you incorporate, you are essentially transferring the client list or “goodwill” to the new corporation. If you don’t file a section 85 rollover, you run the risk of the CRA attributing a value, say $10,000, to your goodwill claiming that really you “sold” the client list to the company and should be paying capital gains tax on the sale. Transferring the goodwill or rolling it over to the company and a value of say, 1$, you will ensure that you don’t pay any tax on the transfer and will protect yourself in case the CRA comes knocking.
Setting up a professional corporation can be an overwhelming experience for some, especially if you’ve already got a busy practice to worry about!
If extra time is hard to find in your practice, send me an email at firstname.lastname@example.org and we’ll discuss the process together, making sure you’re taking the right steps to set up your professional corporation properly.