This article is part of the "Practice Risk Solutions" series for regulated health professionals and health organizations, produced in partnership with BMS Group Ltd.
There are several considerations to take into account when determining the appropriate structure for your business. Your choice should be determined on a case-by-case basis and will be unique to your specific circumstances.
For example: What is the nature of your business? Who will you be operating the business with? What sort of liabilities will the business be exposed to? What are your financing requirements to start and operate the business?
In Canada, the three most common types of business structures are:
- Sole Proprietorships;
- Partnerships; and
There are advantages and disadvantages to each. Further, there is both federal and provincial legislation that deals with setting up a company and therefore in addition to the structure, one should consider whether it makes sense to incorporate federally or provincially.
This article will briefly discuss the differences between these structures and provides a high-level overview of the legal implications of each, including some considerations particular to allied health professionals. This article is addressed to health professionals who are not medical professionals regulated by medical colleges in Canada, including the College of Physicians and Surgeons of Ontario.
Many businesses begin as sole proprietorships. They are viewed as the most basic of the business structures and require little expense to setup and maintain. They can get you off the ground and running with few legal requirements.
As a sole proprietor, you are your business.
- You own all business assets personally.
- You are considered to be self-employed.
- You have full autonomy and hold all decision-making power.
- You reap all benefits of the business (i.e., all profits go in your pocket).
However, you are solely responsible for all aspects of your business.
- All risks, losses, and liabilities belong to you. You have unlimited liability, meaning that your personal assets are at risk if the business needs to satisfy debts with its creditors.
In the event you wish to carry on the sole proprietorship under a name other than your own, a business name registration is required under the applicable legislation. Similarly, depending on the type of business you operate, some licensing requirements may arise. Sole proprietorships are flexible. You can start and end your business with relative ease. However, if succession planning is a concern, you will need to look ahead as your sole proprietorship ends when you pass away.
If you would like to own and share the management of your business with one or more persons, a partnership may be the right choice for you. In Canada, a partnership exists when two or more persons carry on business together with a view to profit. This can take different forms in Canada, including general and limited partnerships (discussed below).
Partnerships are governed by provincial partnership legislation, however, you can further define your partnership relationship and spell out the rights and responsibilities of each partner through a partnership agreement.
In a general partnership, the partners own all assets personally, have unlimited liability and are considered self-employed. Most importantly, the partners are each liable for the debts and obligations of the partnership, and each partner can bind the other partners. You should also be aware that this kind of partnership may be formed even without a formal written partnership agreement.
In a limited partnership, there is at least one "general partner" and any number of "limited partners." General partners manage the partnership and, as a result, have unlimited liability and a greater share of the profits. Limited partners do not participate in the management of the corporation, and act more as passive investors in the partnership rather than active participants. They may share the profits of the limited partnership, but must not take part in the control of the business. In return, a limited partner's financial exposure is capped at the amount of capital they contribute.
While incorporating may seem more complex and expensive than setting up a sole proprietorship or partnership, a corporation's unique characteristics may address some needs that the other business structures cannot.
A corporation has all the legal abilities of a natural person – it can own property, carry on business, borrow, lend, sue or be sued. A corporation is considered to be its own legal entity. So while a shareholder may own shares in a corporation, the shareholder does not own the business or assets of the corporation. As a result, as a shareholder, your personal liability is generally limited to the capital you contribute to the corporation.
Canadian corporations must also have directors and officers to manage the business and affairs of the corporation. These roles may attract liability, so it is important these individuals understand their responsibilities and exposure.
Incorporating can be attractive if you expect to have significant capital requirements. In order to fund start-up costs and future business needs, corporations have the ability to raise capital by issuing and selling shares to investors. Although the issuance of shares may reduce your percentage of ownership in the business, it may mitigate your need to finance your operations through interest-bearing loans and other debt instruments.
Incorporating can also allow you to choose how you pay yourself. For example, you can pay yourself as an employee of the corporation or as a shareholder through dividends.
As the owner of a corporation, there are administrative tasks you must also ensure are completed. A corporation is more expensive and more complicated to set up than the other business structures detailed here. In addition to opening a separate bank account and filing corporate tax returns, you must also maintain a separate set of financial/accounting books, and maintain a minute book containing the corporation's by-laws, resolutions, meeting minutes, registers and ledgers.
Lastly, corporations exist perpetually. If you are considering passing your business on to future generations, incorporating can offer additional succession planning benefits.
Considerations for Health Professionals
In the past, only traditional business owners had the option to incorporate, which meant that regulated professionals were not able to access the structuring advantages of operating through a corporation. However, depending on your particular regulated profession and your jurisdiction of practice, you may now also have the option to incorporate through a professional corporation and access those benefits.
A professional corporation shares many of the attributes typically involved in operating a traditional corporation described above – with a key variance. One of the top reasons for incorporating in the traditional sense is a corporation's ability to shield its shareholders from liability. However, in the case of professional corporations, shareholders are not fully insulated.
Some limited protection may be afforded, however health professionals should be fully aware that the general notion that a shareholders' liability is limited to the extent of their investment is not applicable. Shareholders of professional corporations are responsible for their professional liability.
In addition to the by-laws and regulation of each health profession, further restrictions are placed on professional corporations under governing corporate legislation.
For example, the practice of a regulated profession is the only business a professional corporation can carry on.
Depending on the province and profession, there are also limits on who may become involved in the ownership and management of a professional corporation. For example, the shareholders of a professional corporation will typically be regulated professionals themselves, and will usually all be from the same profession. Typically there is also a similar requirement that the directors and officers of a professional corporation also be a regulated professional.
Even though these restrictions add an additional level of complexity, incorporating a professional corporation can still be an attractive alternative to sole proprietorship or partnerships. In the appropriate situation, they can afford significant tax planning, capital financing, and succession planning benefits.
It is important to keep in mind that these considerations may differ significantly based on the province and the regulated health profession. The governing regulatory body of your health profession will have specific requirements, in addition to your province's applicable corporate legislation. If you wish to incorporate a professional corporation, we recommend that you seek professional advice to ensure compliance with these specialized requirements.