The legal structure of any company affects many aspects of its operation, from its exposure to liability to the taxes it pays. In Ontario, medical professionals, such as physicians and dentists, have the option of incorporating their practice as a special type of corporation known as a Medical Professional Corporation (MPC.) The decision to do so brings with it both advantages and drawbacks, the impact of which will vary depending on your situation. It is advisable to consult with a qualified business lawyer to establish what works best for you.
This blog provides a brief overview of some of the pros and cons of incorporating a Medical Professional Corporation and outlines some of the key considerations.
Am I Eligible?
Not all medical professionals can incorporate, but doctors, dentists, and optometrists are all eligible, as well as chiropractors, massage therapists, and veterinarians.
If you practice in an eligible profession, the next question to ask is whether or not you are self-employed or draw a salary (i.e. you are an employee). Only those who are self-employed may establish a Medical Professional Corporation since employees earning a salary cannot earn income through an MPC.
Note that while many medical professionals may begin their careers as salaried employees, many quickly progress to becoming self-employed and thus become eligible for incorporation.
Pros of Medical Professional Corporations
There are many advantages to incorporating a Medical Professional Corporation, which include:
- Limited Liability —since a corporation creates a distinct legal entity, medical professionals will receive partial protection from personal civil liability (for example, from claims by creditors, suppliers, and landlords). This is usually a major factor in the decision to incorporate. Note, however, that the liability limitation for an MPC is different than a regular corporation insofar as it does not protect medical professionals from being sued for malpractice (professional negligence).
- Expenses – where an MPC incurs business expenses, these generally will be deductible from your tax burden at the usual business rate.
- Income splitting and tax deferrals – in certain situations, salaries or dividends can be paid to family members (whose income puts them into lower tax bracket rates), leading to considerable tax savings. An MPC can also apply the small business deduction on the first $500,000 of business income. If and when the business is sold, there is also an $800,000 capital gains exemption. Available tax deferrals are also significant, especially for high earners.
- Planning for the future – since growing a business often requires a substantial capital investment, having the MPC pay for them will again mean considerable tax savings. The ability to retain passive income in the corporation also allows for income smoothing over time to account for life changes such as parental leave and retirement planning.
Cons of Medical Professional Corporations
Despite all the advantages, there are also a few disadvantages to be aware of when it comes to incorporating a Medical Professional Corporation, including:
- Legal compliance and administrative costs — there’s no getting around the fact incorporation also means more red tape! Aside from the costs of establishing an MPC and appointing directors, there are also ongoing and recurring costs such as ensuring compliance with records and financial statements and tax return requirements.
- Professional compliance – the governing entities of regulated professionals will usually have an additional set of administrative requirements for MPCs.
- Insurance costs – because an MPC is a separate legal entity, it will also require separate insurance, increasing your total insurance costs (although in most cases, these will still be eligible for write-off as a business expense).
Factors to Consider
Evaluating your circumstances is a crucial step in gauging the relative importance of the pros and cons listed above. Whether it is your family situation or simply your comfort level regarding the additional administrative burdens of operating a Medical Professional Corporation, no two individuals will be in the same spot.
Some of the more common considerations to think about include:
- Am I married, or do I plan on getting married? If so, will my spouse also work? Will we have children, and if so, will either myself or my spouse want to take parental leave? Am I comfortable with my spouse and/or adult children being a director (where eligible) or shareholder in the business?
- Do I have any outstanding student loans? Am I in a hurry to pay it off, or am I comfortable carrying the balance for the longer term?
- When do I want to retire? Earlier? Later? Never? Is there any possibility that I will want to take a mid-career sabbatical?
- What are my long-term investment ambitions, and how much do I expect to need for ongoing personal expenses? How much will I want to keep investing in the business?
- Will I want to operate together jointly with other professionals?
One advantage to incorporating at an early stage of one’s career is to develop a comfort and familiarity with having a separate corporate entity so that it becomes second nature. Additionally, the longer a practitioner waits to set up a Medical Professional Corporation, the more assets (and often debt) must be transferred into the new entity, which makes the process more complicated and may trigger significant tax obligations.
Professional Guidance Can Help
Given the wide-ranging impacts of incorporating your business as a Medical Professional Corporation on everything from the taxes, you will pay to your compliance obligations, getting professional advice is invaluable to help get the clearest possible picture about what incorporation could mean for you, allowing you to make an informed choice about how to proceed.
Contact the Corporate Lawyers at Tierney Stauffer LLP in Ottawa & Arnprior for Advice on Business Law Matters
At Tierney Stauffer LLP, we provide comprehensive and forward-thinking advice to our business clients, no matter the size of the operation. Our business lawyers have extensive experience in business law matters, from real estate to licensing and business succession. Contact us at 1-888-799-8057 or contact us online to arrange a consultation today.