Most people agree that starting a business can be a tough experience for any individual. This holds even greater truth for professionals within the health and medicine sector, such as doctors, dentists, chiropractors, and veterinarians.
Individuals in these professions are often the brightest minds in society, and yet their education does little to prepare them for the complexities of starting and running a business. This unfortunate educational misstep is even more striking when considering that many graduates of these professions will end up opening up a practice and running a business.
The historical approach to medical, dental, and veterinarian practices:
Prior to 2001, the norm for these professionals was to operate as sole proprietors, meaning that they were not able to create a corporation that would be a considered a separate operated legal entity. Recent amendments to the law, however, have allowed professionals to incorporate, albeit under the purview of legislative requirements and restrictions.
Given these new legislative amendments, health and medical professionals are now able to incorporate and operate their business as owners or shareholders of a corporation. The question then begs itself: Should professionals incorporate? And, if so, what are the benefits of incorporation that outweigh not incorporating?
Should I incorporate my medical practice?
In short, the answer to the first question is, without a doubt, a resounding yes. Health and medical professionals should absolutely incorporate when they are opening up a practice and will be the owners of that practice. But before outlining why incorporating a business is beneficial, professionals need to know what incorporating itself really means, and how it can be done.
Incorporating means creating a new legal entity, called a “corporation.” The law, in essence, treats corporations as unique individuals or persons. You, as the owner, own shares (or pieces) of the corporation, which can be structured in unique ways. Depending on what restrictions are placed on various types of shares, shareholders of the corporation may be able to participate in company profits or cast votes to decide how the corporation should be managed. What’s important to know is that when you incorporate, you separate yourself from the business. All the contracts you sign, and all the business you do, will not explicitly carry your name on paper, but rather the name of your corporation.
Professional corporations are a special type of business
It is important to note, however, that a professional corporation is a special type of corporation that carries with it certain restrictions. Not just anyone can become a shareholder of your corporation. Other than a few exceptions, the shareholders must be licensed in their field of practice. You must also obtain a Certificate of Authorization from your respective governing body, which will most likely require annual renewal.
There are many benefits to incorporating, and here are just a few of the main advantages that incorporating would carry:
(1) Tax Savings:
This is arguably the biggest financial advantage to a corporation. Without incorporating, most health and medical professionals make an income that puts them within a high tax bracket. It’s not unusual for these professionals to be subject to a tax rate of over 49% on the personal level. On the corporate level, the tax rate is generally 15.5%. This could result in a tax savings of over 30% if the income generated is left in the corporation. Furthermore, if you view the profits of the corporation as a savings investment, then you could defer paying taxes until you retire and qualify under a lower tax bracket. Speak to an accountant to understand this better. At this point, what’s important to note is that you could save yourself a substantial amount on tax payments if you incorporate.
(2) Income Splitting:
The restriction on any individual who is not a health or medical professional owning shares has a critical exception: Immediate family members of the medical professional (such as a spouse, parents, or children) may own non-voting shares of the corporation. This is important because it allows individuals who may fall under a lower tax bracket to receive income. For example, if your spouse makes no other income, he or she can receive up to $32,680 in dividends (which are payments on shares owned based on profits) tax-free. This again is another avenue to taking advantage of tax savings.
(3) Limitation of Liability:
Aside from the tax savings, corporations often shield you from liability. This does not refer to the liability incurred from malpractice, which has a personal liability risk that is offset by the existence of malpractice insurance. Rather, this liability pertains to contracts or agreements made in the course of carrying on business. Agreements with suppliers, employees, and others involved with the corporation could result in disputes. In any dispute, it will be the corporation – rather than the professional – that is involved and could be exposed to liability. As previously mentioned, the law regards corporations as separate legal entities, so if the corporation is found liable, the professional who owns the corporation could still be shielded from liability.
Speak to one of our lawyers today to learn more.
This article is meant to illustrate to health and medical professionals what incorporating really entails, and highlights some of its benefits. Incorporating is beneficial, but only if done right and done with proper legal assistance. Shares must be structured appropriately to give you the best benefit possible. However, if incorporation is done right and done smart, you can experience tremendous benefits and focus on what you do best – help patients.