This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
Book a telephone consultation here: https://wrightbusinesslaw.cliogrow.com/book
_______________________________________________________________________________________
Setting up a professional corporation in Ontario is an excellent way for licensed professionals—such as lawyers, doctors, accountants, architects, and engineers—to manage their practice, gain tax advantages, and limit personal liability. A professional corporation (PC) offers several benefits, but the process of setting one up requires careful attention to legal and regulatory requirements. This blog post will walk you through the essential steps involved in incorporating a professional corporation in Ontario, along with key considerations and resources for successful incorporation.
- What is a Professional Corporation?
In Ontario, a professional corporation is a corporation that is formed by individuals who are licensed or authorized by law to engage in certain professions. This includes, but is not limited to, professions such as law, medicine, accounting, architecture, and engineering. A professional corporation differs from a regular corporation in that it is subject to specific regulatory requirements based on the profession in question.
The main benefits of setting up a professional corporation include tax advantages, limited liability, and the ability to manage earnings and personal income more effectively. However, professionals who incorporate must still comply with their professional regulatory body’s rules, which may impose restrictions on how the corporation operates.
- Steps to Set Up a Professional Corporation in Ontario
A. Ensure Eligibility to Incorporate a Professional Corporation
Before incorporating a professional corporation, you must ensure that you are eligible. Generally, only licensed individuals in regulated professions can form a PC. For example:
• Lawyers must be licensed by the Law Society of Ontario.
• Doctors must be licensed by the College of Physicians and Surgeons of Ontario.
• Accountants must be licensed by CPA Ontario.
Each regulatory body has specific rules that govern the formation of professional corporations. Before proceeding, you should consult your professional association to verify that you are eligible to incorporate and to understand the specific guidelines governing your profession.
- Choose a Name for Your Professional Corporation
When choosing a name for your professional corporation, it must comply with Ontario’s rules for naming corporations. The name should:
• Clearly reflect the professional nature of the business (e.g., “John Smith Law Professional Corporation” for a law firm).
• Include a designation such as “Professional Corporation” or “PC” at the end of the name.
• Not be misleading or imply that the business is engaged in activities outside of the professional services you are licensed to provide.
To check if the name you want is available, you can perform a name search through the Ontario Ministry of Government and Consumer Services or conduct a NUANS (Newly Upgraded Automated Name Search) report to ensure your chosen name is unique.
- Prepare the Articles of Incorporation
The next step is to prepare and file the Articles of Incorporation with the Ontario Ministry of Government and Consumer Services. This document will outline important information about the corporation, including:
• The name of the corporation.
• The corporation’s business activity (which should clearly state that it is a professional service).
• The number of directors, who must be licensed professionals in the same field.
• The address of the corporation’s registered office.
The Articles of Incorporation must be signed by the incorporators (typically the professionals themselves) and filed with the government. Once submitted, the Ministry will issue a Certificate of Incorporation, which formally establishes the corporation.
- Obtain a Certificate of Authorization (if required)
In addition to the Articles of Incorporation, certain professions require you to obtain a Certificate of Authorization from your regulatory body before you can operate as a professional corporation. For example, lawyers must apply to the Law Society of Ontario for a Certificate of Authorization to practice law through their professional corporation. This certificate confirms that the corporation meets the legal and ethical standards set by the governing body for the profession.
Check with your regulatory authority to determine whether you need to apply for a Certificate of Authorization and the specific process for obtaining one.
- Register for Taxes and Obtain an Ontario Business Number (BN)
Once your professional corporation is incorporated, you will need to register for an Ontario Business Number (BN) with the Canada Revenue Agency (CRA). This number is required for all corporate tax filings and will be used for various purposes, including:
• Filing corporate income tax returns.
• Registering for Goods and Services Tax (GST) or Harmonized Sales Tax (HST) if your corporation’s revenues exceed the threshold.
• Payroll deductions if you hire employees.
Depending on your corporation’s business activities and revenue, you may need to register for additional provincial or federal taxes, such as payroll tax, HST/GST, or excise duties.
- Draft a Shareholders’ Agreement (Optional but Recommended)
A shareholders’ agreement is an essential legal document that outlines the rights, responsibilities, and obligations of the shareholders. While not required by law, it is highly recommended for professional corporations, especially if there are multiple shareholders. This agreement can cover matters such as:
• Share transfer restrictions (ensuring shares can only be transferred to qualified professionals).
• The process for resolving disputes.
• Exit strategies (such as buy-sell agreements).
• Dividend distribution policies.
The shareholders’ agreement can help prevent future conflicts and provide a clear roadmap for the operation and governance of the corporation.
- Maintain Compliance with Professional and Corporate Regulations
After incorporating, it is essential to maintain compliance with both corporate and professional regulations. For example:
• You must follow your profession’s ethical and regulatory guidelines, including restrictions on corporate ownership and governance. Some regulatory bodies may require that a certain percentage of shareholders or directors be licensed professionals in the field.
• Annual filings, such as corporate tax returns and financial statements, should be filed in a timely manner to keep the corporation in good standing.
Regularly review and update your professional corporation’s documents and procedures to ensure compliance with both corporate law and your professional standards.
- Key Considerations for Professional Corporations
A. Tax Benefits
One of the primary reasons for incorporating a professional corporation is to take advantage of the tax benefits. A professional corporation may be eligible for:
• Small business deductions, which can result in a lower effective corporate tax rate on the first $500,000 of active business income.
• Income splitting opportunities, allowing the business owner to pay themselves in the form of dividends, which may be taxed at a lower rate than salary.
• The ability to defer taxes by retaining earnings within the corporation.
Consult a tax professional to fully understand the potential tax benefits and ensure compliance with Canadian tax laws.
B. Limited Liability
In most cases, a professional corporation can limit the personal liability of its shareholders and directors, meaning that their personal assets are generally protected from legal actions against the corporation. However, professionals are still personally liable for their own professional negligence or malpractice.
C. Ongoing Professional Requirements
It’s important to note that the professional corporation must continue to meet the standards set by the relevant professional regulatory body. This includes ensuring that directors and shareholders remain licensed and in good standing.
- Conclusion
Setting up a professional corporation in Ontario is a strategic decision for licensed professionals who want to maximize tax efficiency, limit personal liability, and formalize their practice. The process involves several steps, including ensuring eligibility, selecting a name, filing incorporation documents, and obtaining necessary certificates. Compliance with both corporate and professional regulatory requirements is essential to the success and longevity of the professional corporation.
If you’re considering incorporating your practice, it is advisable to seek legal and tax advice to ensure the process is done correctly and that you fully understand the regulatory framework surrounding professional corporations in Ontario.
Sources:
Ontario Business Corporations Act (OBCA), RSO 1990, c B.16.
Canada Revenue Agency
Law Society of Ontario
CPA Ontario