Young doctors often face the incorporation question early in their careers, hearing varying opinions about the ‘right’ time to incorporate. We’re enthusiastic to have Oscar Torres, chartered accountant with Bateman MacKay, discussing the benefits and drawbacks of medical practice incorporation for new doctors in this post.
Medical Practice Incorporation Fundamentals
for New Doctors
Throughout my career as a chartered accountant specializing in small businesses, I often encounter questions about medical practice incorporation. Specifically, I’m asked whether incorporating a medical practice is necessary, what are the benefits of incorporation and the best time for a medical practitioner to incorporate.
Depending what legal, accounting and financial professional you ask, you are going to have different answers to these questions. Namely, there are some common beliefs regarding early medical practice incorporation:
- There is no need to incorporate, until a medical practitioner actually makes good money; or
- Do not incorporate until you’re turning a profit i.e. can leave some money in the corporation; or
- Incorporate only after you’ve practiced for a few years and can afford the fees.
I’d like to make a case to consider early medical practice incorporation based on the pro’s and con’s of it, giving you some food for thought.
What is Medical Practice Incorporation
Incorporation is a process whereby a medical practice becomes it’s own entity, a corporation – with specific tax, financial and legal implications. There are different rules and regulations within each province in Canada for medical practice incorporations. In Ontario, the incorporation of a medical practice is regulated by The College of Physicians and Surgeons of Ontario (the College).
Medical corporations do not protect practitioners from liability as the ultimate responsibility remains with the practitioner and it is not shelter with a medical corporation.
DRAWBACKS to Medical Practice Incorporation
The most commonly cited drawback to incorporating is the cost. Typically, legal and financial (accounting) fees make up majority of that cost. In Canada, on average fees range between $2,500 and $3,500.
If you defer incorporating your medical practice, these fees will likely increase due to the fact that over the lifetime of a non-incorporated practice, as assets and debts are created, such assets and debt will have to be rolled over on a tax effective basis. This creates additional responsibilities for the lawyers and accountants involved in the process. As such, thinking long term, there’s benefit in incorporating sooner rather than later because these legal and accounting fees will be nominal in the short term as the medical practice has no assets or debts.
Incorporation is NOT a good idea if a medical practitioner is planning to go back to school full time.Click to tweet
A medical practice is a separate entity and therefore must comply with its own tax filings and its own bookkeeping and accounting requirements in order to properly file corporate taxes.
Properly organized records will simplify the filings. Using a bookkeeper to track the corporation’s activities is suggested. Bookkeeping fees will not vary, whether or not a doctor is incorporated. Since the corporation is a separate entity, it has to incur the additional costs of filing corporate taxes based on its own financial statements.
BENEFITS of Early Medical Practice Incorporation
Although incorporation should be looked at on case by case basis, overall, the earlier a medical practitioner incorporates, long-term benefits outweigh overall costs. A newly graduated medical practitioner likely does not have many assets or debt to contribute to the corporation, but rather there is a significant balance somewhere in a line of credit that will have to be repaid, as the doctor begins to practice.
The longer a doctor practices in his/her particular field the more assets and debt that are created by the practice, and the more complicated incorporation becomes.
Simplicity & Less Hassle:
The College requires the practitioner to complete an application and incur fees when the corporation is formed. If a practitioner incorporates as soon as he/she is ready to practice, it is simpler to complete the application and pay the fees. Rather than having to complete the forms, followed by having to re-do the process all over again, once the decision to incorporate has been made.
One of the greatest benefits of incorporation is having choices . Including the choice of how and when to distribute the money out of the practice.
- How to Distribute Your Income: The College requires that 100% of the common shares of any medical practice be owned by the practicing doctor. It also allows direct family members to own non-voting shares. The ownership of shares by the family members is what provides the choice of HOW to distribute the income, providing income-splitting opportunities, and therefore a lower tax burden for the physician and the family as a whole.
- When to Distribute Your Income: The corporation can choose when to pay the doctor and other shareholders, providing tax deferral opportunities with the proper planning in place. An un-incorporated doctor will have to pay taxes in the same manner in which personal taxes are due, and therefore have no choice. An incorporated doctor has the option to determine the fiscal year in which to make distributions to the shareholders, and therefore defer the taxes payable personally, i.e. paying a dividend the current fiscal year, or the next fiscal year, depending on cash flow needs.
What I have noticed with earlier incorporation is that it sets precedent for new doctors to efficiently establish and manage their practice. By starting your practice as a corporation, you avoid the time consuming steps of incorporation after practicing personally for a while. You also develop habits from the start that benefit your corporation not yourself, which sometimes is an adjustment for unincorporated doctors who go through the process.
Laying the Groundwork for Success:
If you know you’re going to be practicing for years to come, medical practice incorporation is financially efficient because you’ll save on the initial College fees and only have to pay incorporation fees. Establishing a relationship with your professional team of advisors early on, will help to ensure your growing practice is set up in a financially efficient manner. Allowing you to mitigate and defer taxes professionally and personally.
Buying Life Insurance Through the Corporation:
Life insurance premiums where the medical practice is the beneficiary can be paid by the corporation with pre-personal tax dollars. The asset cost base of the policy (not the premium) will be deductible for tax purposes, only if the life insurance is required by a lender to secure a mortgage or a line of credit, otherwise it can not be deducted as a tax expense for the corporation or it would make the benefit taxable. Either way, there will be a net cash benefit of paying for the insurance premiums from within the corporation, since the premiums are paid with corporate after tax dollars (as opposed to personal after tax money), representing savings of around 20% when compared to a doctor. The insurance proceeds are paid out tax-free using the company’s capital dividend account, which will in turn enhance the amount to be passed on to the estate.
If you’re considering medical practice incorporation, look for legal, accounting and financial professionals willing and able to give you comprehensive business-planning advice. As you will need tax and financial planning advice and services beyond simple tax return filings.
As a medical professional, what is your view about medical practice incorporation early in your career?