FOR CANADIAN NATUROPATHIC DOCTORS, the big question is whether or not to incorporate. Presuming that ND’s have the right, is it worth it?
In Ontario, once proclamation passes (2015, fingers crossed) NDs will be able to incorporate the practical side of their business. Each province and state have their own regulations, so please check with each board.
This article will briefly outline the different types of business structures for Naturopathic Doctors and look at the pros and cons to incorporation. The most important thing is to make sure you speak to a professional (accountant, lawyer or financial planner) for advice as it pertains to your individual situation.
The 3 ways that an ND can operate a business:
1. Sole Proprietorship
This is most common and simplest form. Only one owner and the Naturopathic Doctor is responsible for making all the business decisions, sharing in all the profits/losses and assuming all risks and obligations.
A partnership is a relationship between two or more entities (usually people) in a business with a goal of turning a profit. The organization is usually more complex than a sole proprietorship with more than one owner to share in the decision making, the profits/losses and assumption of the risks and obligations.
This is a legal entity that has its own legal personality distinct from its owners (called shareholders) and the individuals who manage and run its affairs and business (called directors and officers).
The creation of a corporation occurs following the proper filing of Articles of Incorporation (also called a Charter or Certificate of Incorporation) with the relevant Government. With incorporation, Naturopathic doctors must file as a professional services corporation (see below).
There are four primary reasons that Naturopathic Medicine businesses incorporate. The first is to reduce personal income tax for its shareholder(s); second is for further tax planning strategies; third to limit liability (protecting personal property); and fourth is for perceived credibility & prestige (ego).
Depending on where you live, there may be a potential tax-rate saving of almost 30% between the highest personal income tax rate and lowest corporate rate. Money that is left in a corporation, after all expenses, is referred to as retained earnings and is taxed at the lower corporate level.
There is a healthy debate amongst accountants and planners as to the amount to leave in the corporation each year for incorporation to be a wise move. That amount, after paying all expenses including the income needed by the shareholder(s), ranges from $25,000 to $100,000.
The strategies are forever changing.
Professional advisors are constantly looking for ways to minimize taxation for their clients and Governments are constantly plugging those loopholes up.
So the following list is apt to change, but some of the more common tax strategies in Canada are (where you are they may be named something different):
- Individual pension plans (IPP’s)
- Health and Welfare Trusts (often referred to as Private Health Spending Plans – PHSP’s)
- Medical/health, dental and supplement costs
Limitation of Liability
Liability protection isn’t as extensive for ND’s as it is with other businesses.
The reason is NDs need to incorporate as a professional services corporation which differs from a general corporation in that there is no alleviation of liability for malpractice issues.
There is, however, still the limitation for personal liability issues that can be alleviated (ie. business debt).
Credibility and Prestige
As a rule, people are not going to admit to incorporating their business for ego reasons, but it is far more common than you might believe it to be.
There are a number of reasons that incorporation might not be the smart thing to do:
- Start-up costs are expensive (lawyer and government fees generally start at $1,500).
- A corporation must submit its own tax return (usually costing a minimum of $750/year).
- Time consuming maintenance of corporate records.
- Potential for double taxation.
In addition to the above disadvantages, professional services corporations also have the following constraints:
- All shareholders must also be individuals of a ‘like practice’ (i.e. you can’t have your spouse as a shareholder unless they are also a registered health professional).
- A professional services corporation has a less stable business life than a general corporation due to the dependence on its members. (ie. the death or disqualification of a shareholder may result in dissolution of the corporation).
- Often both the individual practitioner and the corporate entity needs to be licensed, which results in double costs in order to practice.
Now that we have briefly touched on the pros and cons, I hope that you agree that incorporating your practice when the time comes may be a smart move or it may not be. The key is to work with your financial advisors to determine what is right for you.