Busy medical professionals have a lot to think about but taking the time to consider the pros and cons of incorporation often gets overlooked. The business side of running your practices can be complex, but incorporating is a strategy that can help you to manage your financial affairs more efficiently.
In this comprehensive guide, we’ll explore the pros and cons of incorporation so you feel prepared to make an informed decision about this significant financial step. If you’re looking for more nuanced financial advice, our team at MMT Chartered Professional Accountants is experienced working with medical professionals, and we look forward to discussing the specifics of your unique situation with you!
The Pros of Incorporation
1. Tax Efficiency: Incorporation can offer significant tax advantages. For example, corporations are taxed independently from your personal finances, enabling you to benefit from the lower corporate tax rate. You may also be able to benefit from tax deferrals.
2. Creditor Protection: Incorporation provides a level of protection for your personal assets. In the event of a lawsuit or business-related debts, your personal assets are typically shielded from legal claims against the corporation.
3. Enhanced Retirement Planning: As an incorporated medical professional, you can create an Individual Pension Plan (IPP) to enhance your retirement savings. IPPs are defined benefit pension plans that make it easier to save for your future while enjoying tax advantages. The corporation can make tax-deductible contributions on your behalf, allowing you to benefit from tax-deferred growth.
4. Business Expense Deductions: Incorporated medical professionals may have more opportunities to deduct business expenses, such as office rent, administrative costs, and professional fees, reducing your overall tax burden.
5. Income Deferral: Incorporated professionals can choose when to take income, allowing for income deferral. This can be especially beneficial for those who want to defer income to a lower tax year or strategically withdraw funds during retirement.
But There Are Also Cons…
1. Administrative Burden: Running a corporation involves additional administrative work, such as managing corporate records, financial statements, and annual tax filings. Many medical professionals find this increased administrative load burdensome.
2. Loss of Personal Tax Credits: When you incorporate, you may lose access to certain personal tax credits and deductions, such as the Lifetime Capital Gains Exemption (LCGE) and the ability to deduct mortgage interest.
3. Professional Corporation Regulations: Medical professionals are subject to specific regulations regarding professional corporations, including limits on who can be shareholders and the nature of services provided. These regulations can restrict flexibility in some cases.
4. Complexity of Tax Planning: While incorporation offers tax advantages, it also involves complex tax planning and compliance requirements. Medical professionals often require the guidance of tax experts to maximize the benefits and remain compliant.
5. Initial Costs: Incorporating your medical practice comes with upfront costs, including legal and accounting fees. These costs can be a barrier for some professionals, particularly those in the early stages of their careers.
What to Consider
We get that it’s overwhelming and that there’s a lot to consider. You can help focus your decision on the following list of factors, but it’s also beneficial to seek professional guidance when making significant financial decisions. That’s why MMT Chartered Professional Accountants offers services specific to medical professionals, so we can help you weigh the advantages and disadvantages of incorporating that are unique to your situation. In the meantime, you can begin by considering these factors:
1. Long-Term Plans: Think about what you want your financial goals and career trajectory to be over the long term. Incorporation may offer more significant advantages over time, but it requires commitment and planning, and may not be right for you, depending on what stage of your career you’re in.
2. Income Splitting Opportunities: Although laws have recently changed on income splitting in Canada, there are some limited opportunities to benefit from income splitting if you’re an incorporated medical professional. These include family members who work a minimum number of hours for your business who may be entitled to dividends, or after reaching the age of 65, when you may be able to distribute your dividends to a spouse.
3. Protection for Assets: Evaluate your risk tolerance and the need for asset protection. If you’re concerned about potential legal claims or business-related debts, incorporation may provide peace of mind.
4. Administrative Capacity: Be honest about your ability to manage the administrative responsibilities that come with incorporation. If you’re not comfortable with the additional workload, seek professional assistance.
5. Tax Expertise: Given the complexities of tax planning and compliance for incorporated medical professionals, consider working with a tax specialist or an accountant with expertise in healthcare.
6. Salary Versus Dividends: Incorporating offers you some flexibility in how you’re paid, which may be beneficial. It requires complex calculations but working with a professional financial advisor will enable you to maximize this flexibility to your advantage.
The Bottom Line
Incorporation can be a powerful financial tool for medical professionals in Canada, offering significant advantages for some, but it’s not an easy decision to make. Consulting with legal and financial experts who understand the intricacies of incorporation can help you navigate the process and make informed decisions with confidence.
Trust MMT Chartered Professional Accountants for all of your financial needs as a medical professional, and get back to doing the work you love with confidence and security.