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Incorporation links: Main page About the law Articles FAQs Fees Lawyers And... Other areas Reference links |
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by Jeffrey S. Lowe
In BC, certain professions, such as doctors, dentists, and chiropractors, are allowed to operate through a corporation. The rationale is that while they are professions, these are also small businesses, and should be able to take advantage of certain tax planning features that other small businesses have. How is a professional corporation different than a normal BC corporation? Each profession will have different rules regarding incorporations. Normally, the restrictions will include (this list is not exhaustive): Ownership of voting shares Ownership of non-voting shares Restrictions on directors and officers Reporting initial shareholders and changes Consequences of default 
Ownership of voting shares This is normally restricted to licensed members of the profession. For example, only members in good standing of the College of Physicians and Surgeons can hold voting shares in a corporation which practices medicine. Top of Page Ownership of non-voting shares This is usually restricted to the spouse and children of the professional. There are often provisions for a holding company or a trust to hold non-voting shares for the benefit of the spouse or children. Top of Page Restrictions on directors and officers Normally, only the professional may be a director or the president; however, there is usually no restriction on who the secretary can be. Under the BC Company act, the president and the secretary must be different people if there is more than one shareholder. Top of Page Reporting initial shareholders and changes Some professions require that before the corporation commences business, the professional must provide a list showing the names of each shareholder, and their relationship to the professional. Top of Page Consequences of default It is imperative that all incorporation requirements are strictly carried out. Failure to do so usually results in a determination of "unprofessional conduct", and may lead to disciplinary action on behalf of the governing body. Top of Page
What are the benefits of incorporation? The main benefit of professional incorporation is in estate planning, to minimise your ongoing taxes: now and when you sell your practice. Recent tax legislation has reduced these benefits, but professional corporations are still useful in many situations. Work income Vs business income In any professional practice, there are at least 2 kinds of income that you earn. One is the "work income" of the position, and the other is the "business income". How much would it cost to hire a doctor or dentist on salary to do the professional work that you do, if they didn't have to invest any money, or pay any overhead, or handle any administration, personnel, and other business matters? You can think of this as "work income". You can think of the rest of the income that you make as "business income", which results not from your professional practice, but the business side of operating that practice: investment, risk taking, management and administration. Dividing the business income Now, you may have a professional practice that earns you a net of $150,000 per annum. To hire a competent professional to do the work that you do would only cost $75,000 per annum. You may be able to set up a professional corporation, in which you would own the voting shares and your family own the non-voting shares. The corporation hires you to do the professional work for it for $75,000 per annum, and your spouse may do the administration work for $25,000. The remaining $50,000 may be divided amongst the shareholders, which could include other family members. You may also have preferential tax treatment if you sell your professional company. The capital gains would be spread out over several individuals, and you may even be able to have substantial tax free capital gains. It is essential to seek sound legal advice regarding any professional incorporation, as tax and corporate laws change regularly. |
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