There are many things to consider when starting a business, no matter what type of business it is. There are so many terms floating around that it can be hard to decide which options are best for you. Another of those terms is a ‘professional corporation’.
In order to help you understand what a professional corporation is, and who can register, let’s explore the subject a little more.
A professional corporation is a business or corporation which delivers services and is regulated by a particular professional body, e.g. College of Physicians, Law society of Upper Canada etc. Professionals who want to offer their quality services via a company, should become a professional corporation.
To help narrow down the word ‘professional’, this pertains to the following types of occupations:
● Doctor (Physician)
Any job which is governed and controlled a professional association or body. This is the only type of profession which is able to register as a professional corporation.
You might wonder why you would want to set up a professional corporation if you really don’t have to, but there are of course some advantages to think about. These are mainly tax related and include:
● You can utilize tax deferrals. This is the difference between the highest personal tax rate, and the lower small business rate. By registering, you are able to defer tax payments to some time in the future, when you are within the lower bracket. This saves you money!
● You can also utilize something called income splitting. This is when you pay a family member a salary. If the person is in a lower tax bracket, you can split the full tax amount between you and them, and you will save because of their lower tax bracket status.
There is however one drawback, and that is the huge liability issues. If you are sued due to a mistake or another complicated issue then the corporation which governs your profession doesn’t offer you any protection. It’s vital to check your insurance to find out the full scope of your actual protection from that end, however you will usually get some protection against creditors on money you’ve borrowed.
Before you make your final decision, it is vital that you read up on everything pertaining to professional corporations, to find out if you are going to receive any benefits or not. The liability issue is quite a prominent one for most people, but the tax relief is certainly attractive!
This might not be the right option for you, but it is certainly something you should think about, in order to receive those tax benefits. In many ways, it comes down to the profession you are in, in terms of how risky the level of liability is. We live in an age where there is a ‘no fee no claim’ upsurge, and that means liability is always questionable. A high level of insurance protection is something you need to consider.
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- Written by: Jag Bath