Should You Incorporate Your Medical or Dental Practice?
Running a medical or dental practice is not the same as operating most businesses. In fact, until relatively recently, regulated professionals did not have the option to incorporate and access the advantages of operating as a corporation. Even now that incorporating your practice is an option, health professionals need to understand that the concept that a shareholders’ liability is limited to the extent of their investment is not applicable since you are still responsible for your professional liability.
What is a professional corporation?
In essence, by incorporating your practice, you are creating a separate legal entity that owns your practice and all its assets (equipment, goodwill, supplies, etc.) rather than you personally owning it. Payments for your services are made to the corporation, and it is also responsible for paying your salary, dividends, or bonuses depending on whether you are a shareholder, director, or employee.
What does it cost to incorporate?
Your specific circumstances will determine the costs to create and maintain a medical corporation, but nearly all will include working with an attorney to set up the legal entity. If your situation is straightforward, your start-up fees may only add up to a few thousand dollars. If you have multiple shareholders or other factors that complicate the incorporation process, you can expect to pay more. Once you are incorporated, you will have ongoing legal and accounting advisory fees to pay, though in some cases it remains about the same as you are paying now as a sole proprietorship or partnership.
What are the advantages of incorporating?
As a rule, a sole proprietor/practitioner pays taxes on his or her net income (gross income less expenses) which is taxed using progressive personal tax rates (in Quebec, those rates can be as high as 49.75% for every dollar of taxable income earned above $155,000 and 53.31% for every dollar of taxable income earned above $221,000). One of the advantages of incorporating is that your practice will now be taxed as a corporation effectively allowing for tax deferral and even tax minimization. Corporate tax rates are lower than the top personal tax rates and vary depending on the province. In Quebec, those tax rates are the following:
- The first $500,000 of active corporate taxable income may be taxed at a combined rate as low as 12.20% for corporation meeting certain eligibility criteria.
- For corporations that do not meet the eligibility criteria and for income and for active income above $500,000 the combined tax rate is 26.5%.
In addition, dividend distributions from the corporation to the shareholder are taxed at progressive rates which are less than the highest personal tax rates on salaries or business income.
Another reason to consider incorporation is it creates the option of splitting income with family members, including a spouse or adult children. This may involve setting up a family trust as a shareholder of the company. Before implementing this planning strategy, tax on split income (TOSI) and income attribution rules in the Income Tax Act must be reviewed. In addition, restrictions imposed by various professional orders about shareholding in professional corporations should be considered. Keep in mind that income splitting with a minor child does not generate any tax savings as dividends paid to a minor are taxed at the maximum marginal rate (kiddie-tax rule).
There are also capital gains benefits to incorporating if you are planning to sell your practice in the short or mid-term future. By selling a corporation, as a shareholder you may be able to take advantage of the $913,630 capital gains exemption when selling your shares as long as they qualify as qualified small business corporation shares. This can create significant tax savings.
Additionally, certain non-deductible expenses, like life insurance policy premiums are less expensive since the corporate income tax rates are lower than individual rates.
Other advantages depend on your specific situation but are certainly worth investigating.
Are there disadvantages to incorporating?
We mentioned the costs of incorporating above, and there can be additional annual fees for running a corporation like keeping a corporate records book. Your accounting costs can also be higher since you must complete and file both a corporate and personal return each year.
Something else to consider is how much money you will need to draw from the corporation to meet your living expenses versus what you can keep in the corporation from year to year. The biggest tax advantage is that corporate income is taxed at a lower rate, as we explained above. So, if you need most or all of what you earn to cover your day-to-day cost of living, then you may not benefit from the lower corporate tax rates by leaving money in the corporation. Early-stage physicians and dentists may have higher expenses, including repaying medical school loans and the cost of establishing a new practice, which means that leaving money in the corporation may not be an option, and thus incorporation may not benefit them. But as professionals get established, incorporation may make more sense.
Is there anything else to consider?
Ultimately, your unique circumstances will determine the best path for your practice from a legal and financial perspective. The liability of the professional(s) who will become shareholders is limited for things like company and contractual debts to lenders or suppliers, etc.) but not for professional negligence whether committed personally or while supervising or managing another practitioner. Professionals who serve as corporation directors will assume the duties and responsibilities set out by legislation, including those for unpaid salaries, source deductions, uncollected sales tax or sales tax not submitted to the government.
If this is something you are considering, we encourage you to contact us to discuss further. We have the knowledge and experience to help you make the right decision with confidence and to ensure your corporation is properly integrated with your overall financial plan for years to come.