Attention Professionals: What You Should Know About Professional Corporations
Since late 2001, regulated professionals such as lawyers, accountants, physicians, dentists, chiropractors, veterinarians, architects, engineers, and regulated health professionals have been allowed to offer their professional services (as well as ancillary or related services) through what are called “professional corporations” (“PCs”). In so doing, these professionals can take advantage of some of the benefits that incorporating a business brings, mainly with respect to tax incentives (e.g., tax deferral, income splitting, dividend payouts, etc.). However, while PCs share many of the same facets of other corporations, there are some important differences, which are the result of the specific rules and by-laws of the governing bodies of the regulated professions and relevant legislation.Unlike the regular corporation that can insulate its shareholders from corporate liability, the PC does not limit personal professional liability of the professionals offering their services vis-à-vis their PC. Indeed, the governing bodies of the regulated professionals have the ability to “look through” the PC and hold the professional shareholders fully accountable for their actions. Clearly, the policy reason for allowing professionals to incorporate was only tax-driven (i.e., to allow these professional self-employed individuals to share in the tax benefits enjoyed by other non-professional self-employed individuals), not to provide a means for professionals to skirt their personal professional liability (e.g., malpractice, negligence).
There are also ownership restrictions with respect to PCs. With most PCs, all shareholders must be members of the same regulated profession. If the professional is a chiropractor, his or his PC can only have shareholders that are also chiropractors registered with the College of Chiropractors of Ontario. Directors and officers of the PC must also be shareholders of the PC (and thus members of the same regulated profession). However, some medical professionals are now allowed to professionally incorporate and add immediate family members as non-professional, non-voting shareholders of the PC – this exception is again only for tax reasons (e.g., income sprinkling), and not to shield the professional from personal professional liability.
Professionals must also comply with specific naming requirements as prescribed by their respective governing bodies when incorporating their PCs. All PCs must contain the words, “Professional Corporation”, at the end of their corporate name and cannot have number names (e.g., 123456 Ontario Professional Corporation would not be acceptable). Some governing bodies also require that the name of the PC include the type of profession (e.g., John Smith Dentistry Professional Corporation), as well as the surname of the professional. Again, the governing bodies want to ensure the public is fully aware when they are dealing with a regulated professional.
The articles of incorporation of the PC must also be drafted in consideration of the rules of the governing body of the regulated professional and professional incorporation legislation. For instance, the section of the articles regarding any restrictions on the business of the PC must contain express language that the PC may not carry on a business other than the practice of the particular profession (and any ancillary activities, including the temporary investment of surplus funds). Many professional governing bodies also require that the articles not contain language that may suggest that a non-member of the governing body may own shares of the PC.
Upon successful incorporation of the PC, the next step is to obtain a Certificate of Authorization from the appropriate professional governing body. Without obtaining such certificate, the professional is not permitted to offer their professional services through the PC, even if the PC has complied with the applicable legislation and by-laws of the respective governing body. Most of the websites of the governing bodies contain instructions on how complete and submit an application to obtain this certificate, including paying the applicable fees in doing so.
If you are regulated professional thinking about incorporating your professional practice, be sure to contact a business lawyer who understands the unique intricacies surrounding professional corporations.