The Incorporation of Your Dental Practice
Part 2 of 4 : 15 Benefits to Consider and Few Disadvantages!
By Pierre de Boucherville
FOR THE INCORPORATION OF YOUR PRACTICE
Two main types of benefits favour the use of a business corporation for your dental practice: tax benefits reserved to business corporations and benefits related to the protection of corporate assets.
Tax Benefits: a partial list
1-Lower tax rate when compared to the rate which applies to individuals;
2-Potential Capital Gain Exemption of $835 716;
3-Savings on financing;
4-Income tax deferral;
5-Income splitting (as long as the July 2017 proposed legislative change are not in effect);
6-Reduced cost of non-deductible expenses;
7-The possibility of doing an estate freeze;
8-The possibility of paying a $10 000 tax-free death benefit to the estate of the main shareholder;
9-The non-application of the restrictions on home office expenses;
10-Access to various tax credits (R&D and others).
In addition to these benefits it is worth mentioning the possibility of choosing the type of remuneration you receive.
You may choose to receive, in accordance with your needs, a salary, dividends or a combination of both. This allows you to further reduce your income tax.
Furthermore, the possibility to benefit from the capital gain tax exemption after the sale of the shares of your dental corporation, by itself, represents more important savings.
Benefits Related to the Protection of Assets
11-The creation of a business corporation (an independent moral person under law) limits your personal civil liability with regards to various matters, particularly those of a financial nature: this is called the corporate veil;
12-A business corporation is an entity with a perpetual existence, and its ownership is easily transferable;
13-It is easier to finance a business corporation;
14-A business corporation facilitates the planning of your estate;
15-A business corporation facilitates the liquidation of your estate.
The Protection of Your Assets
If your practice generates enough profits so that you have more funds than what you need to live, you can transfer such sums -tax free- as corporate dividends to a management corporation (holding) under your control. This allows you to put capital out of the reach of your practice’s creditors. You then may use your holding to make investments.
Using corporate income is much more profitable than using individual income to finance the purchase of equipment or the shares of a dental corporation. Benefitting from a much lower tax rate and other advantages (deducting interests, amortization, a corporation is in a much better position than an individual to make important investments.
In both estate planning and liquidating, it is easier to transfer the shares of a business corporation operating a dental practice than to proceed to a full inventory of all the assets used by the practice and to try to distribute them fairly.
AGAINST THE INCORPORATION OF YOUR PRACTICE
Disadvantages of a Business Corporation
-The corporate veil may be lifted and your personal liability may be held in certain cases;
-The business corporation (rather than you, personally) owns the dental practice and its assets;
-A personal guarantee may be requested when the corporation needs to borrow funds;
-Initial and recurring fees must be paid to maintain the corporation’s existence in good standing (government, accounting and legal fees);
-Loans to shareholders are subject to some restrictions;
-If the dental practice was in operation before the creation of the business corporation, its owner loses the benefit of amortization during the year in which the transfer of assets between himself and the corporation takes place.
A business corporation is a tool which offers a hard-to-beat return in investment in most situations. But it is only one element of a business strategy.
The few disadvantages of an incorporation cannot, in most cases, make the use of a business corporation a bad choice for Quebec dentists, except, maybe, and subject to an examination of all data, in the case of a very modest practice, or one with unusually minimal profits.
Do not hesitate and get your free consultation: call us now to discuss your plans!
DISCLAIMER : Please note that the information contained in our articles does NOT constitute legal advice. It is provided for educational purposes only. Laws are subject to change without notice. The content of our articles may be outdated. If you need legal advice ore representation, please contact Pierre de Boucherville.