Is Incorporation Right For Your Practice?
59% of OCA members describe themselves as sole owners or partners in a practice. Another 24% are associates and contract employees of a clinic. When tax season approaches, many chiropractors will find themselves wondering if incorporation is a viable and appropriate strategy for their businesses.
The team at SRJ Chartered Accountants suggest that the decision whether or not to incorporate your practice depends on three factors. These factors include:
- management of legal liability,
- taxation implications, and
- record keeping and compliance obligations.
Management of Legal Liability
Principals in unincorporated business structures, such as sole proprietorships and partnerships, do not enjoy the same liability protection as those in corporations.
For example, in a sole proprietorship, the individual who owns and operates the enterprise is personally liable for the operations of the business, including its debts. This is because the business is not a separate legal entity from the individuals by whom it is operated. A corporation is a separate legal entity and entitled to “limited liability”.
Keep in mind that the “limited liability” benefits of incorporation do not apply in all instances and it is important to speak with your accountant or lawyer to gain further clarification.
Incorporation provides significant tax benefits. In Ontario, the tax rate on the first $500,000 of taxable corporate income can be as low as 15.5% if the corporation is classified as a Canadian Controlled Private Corporation (CCPC). There are specific requirements of a CCPC and it is important to consult with your accountant to ensure you meet the requirements.
There are also capital gains benefits when selling a practice that is organized as a corporation. These benefits must be balanced against the costs associated with starting up and operating a corporation. For instance, an additional set of tax returns must be filed annually on behalf of the corporation in addition to your own personal returns. Corporate returns are more costly to prepare as they are generally required to include a complete set of financial statements. This is also the case with partnerships.
The capital gains deduction available when selling qualified small business corporation shares is often referred to as the lifetime capital gain exemption and, starting in 2014, each Canadian who wishes to utilize this benefit can be shielded for up to $800,000 in lifetime capital gains. There are specific criteria that need to be tested for the lifetime capital gain exemption. Speak to your accountant or lawyer to determine if you qualify for this exemption.
It is a myth that only incorporated businesses can deduct expenses from their revenues when reporting their income to the Canada Revenue Agency. Even in a sole proprietorship, where the personal tax returns of the proprietor serve as a business return, business operating expenses can be claimed for tax purposes. Many sole proprietors find this system to be efficient and less costly to maintain. However, personal income tax rates, which can reach as high as 46.1% in Ontario, can result in greater tax liability for sole proprietors. Additionally, tax planning is more challenging for sole proprietors than for incorporated practitioners. Incorporation gives individuals more options for tax planning and tax savings.
Record Keeping and Compliance
In addition to preparing financial statements at tax time, there are record-keeping obligations for corporations. For instance, separate bank accounts must be maintained for the corporation and the corporation must also keep an updated minute book. Compliance standards for various regulatory and human resources requirements are generally higher for corporations.
The College of Chiropractors of Ontario (CCO) also has specific requirements for the provision of chiropractic services from a corporation. For instance, all shares of the corporation must be held by one or more CCO members and all directors and officers of the corporation must also be shareholders.