Professional Corporations for Engineers
Did you know that there are substantial tax savings available to professionals? A professional corporation is a corporation that provides professional services under a regulated governing body. Unlike standard business corporations, engineer professional corporations in Alberta operate under a modifies set of rules. Some people refer to these types of corporations as engineering PCs or engineering Prof Corps. Much like other professionals, engineers seek to maximize their earnings while increasing their engineer practice. In Alberta, engineers require engineer professional corporations to practice as a corporation. They cannot simply incorporate a regular company. Having a professional corporation as an engineer can protect your liability as a professional, as well as offer several tax benefits, such as income splitting. The corporate lawyers at Kahane Law Office are able to set up your Engineering PC for you.
First Step To Setting Up An Engineer PC
To register engineer professional corporations, you must first obtain written consent from Engineers Canada from the province or territory that you will be offering your services in. For any engineer wishing to practice in more than one province, an additional letter of consent must also be obtained from the respective province. This means if you’d like to practice in both Alberta and British Columbia, you’ll need to obtain written consent from The Association of Professional Engineers and Geoscientists in Alberta (APEGA), as well as The Association of Professional Engineers and Geoscientists in BC (APEGBC). Setting up engineer professional corporations without this consent is not allowed.
The Benefits Of Engineers Professional Corporations
Having a professional corporation as an engineer not only allows you to operate your engineering business as a professional in Alberta, it comes with other benefits such as:
Engineer professional corporations automatically receives a lower tax rate than a personal tax rate. This is because the earnings of a professional corporation are initially taxed at the corporate level, and taxed at the personal level after the company distributes income to its shareholders though dividends or salary. As of 2018, the highest personal tax rate is 48% and the general tax rate for small businesses is 12%. But with a professional business corporation, you also have the option to defer taxes. This means that when you are in a higher tax bracket, you pay taxes on revenue not withdrawn at a future date (or when at lower tax bracket) to receive greater tax savings overall. This allows you to wait to withdraw funds from your professional corporation when in a lower tax bracket.
If you practice without a professional corporation and you earn $250,000 a year, your taxable income is that amount even if you only require $60,000 to cover your expenses for the year. If you have a professional corporation, you can take out $60,000 to cover your expenses and avoid paying the higher income tax rate.
Generally, a corporation protects your personal assets should legal issues arise. A corporation is a separate entity than its shareholders. This means that your liability is only limited to the investments and assets in your company.
However, in a professional occupation such as an engineer, a professional a corporation may not provide all the protection you require. For this reason, you may want to learn more about limited liability insurance for engineers in addition to the limited liability you receive with your professional corporation.
Income and Capital Gains Splitting
As a professional corporation, you may be eligible to split your income and capital gains with members of your family (such as spouses or children). This makes most sense if they are in a lower tax bracket. This helps to reduce the taxes your professional corporation pays overall. There are limits to this type of splitting, so talk to your accountant.
When you register your corporation as an engineer, it is crucial to have a proper legal structure in place. This avoids future headaches and errors, especially since laws governing engineers vary between provinces.
An Alberta lawyer can register a corporation for you, as well as advise on shareholder and dividend information. A lawyer can also assist with professional documents your incorporation may require such as contracts, consulting agreements and additional registrations.
What A Professional Corporation Does Not Do for an Engineer
Engineer professional corporations do not restrict an engineer’s liability for negligence or malpractice. Most corporations protect the shareholder from personal liability. This is not the case with a professional corporation. Engineers remain jointly and severally liable for negligence or malpractice, even when they provide services through their professional corporation.
However, a professional corporation limits other forms of financial liability. For example, for bank loans to purchase office equipment and leases for office space. If you have not signed a personal guarantee, a professional corporation may shield your personal assets from being liable.
Generally, if you have a personal corporation, exceptions to liability include:
- when a shareholder personally guarantees a business debt;
- piercing of the corporate veil and;
- professional negligence or malpractice.
What Are the Drawbacks of Incorporating?
Before incorporating as a PC, you should do a cost benefit analysis to consider whether the tax savings justify the on going costs associated with incorporating. You must pay for annual financial statement preparation every year. This includes preparing T2 corporate tax returns, renewing incorporation permits and paying payroll and capital taxes.
Further, you should assess your cash flow needs. If you withdraw all the income in your professional corporation to support personal cash flow needs, the tax savings advantage of a professional corporation is limited.
Lastly, if you practice engineering with a large group of partners that operate in multiple provinces, it may not make financial sense to incorporate. This is because each partner will pay tax on a portion of the income they earned in each province. If one of the partners’ personal income tax rate is lower than the corporate tax rate, it may not be beneficial to incorporate.
How Should I Withdraw Funds from my Professional Corporation?
This is an accounting question and not a legal one so it is important to discuss this with your accountant. Funds can be withdrawn from your professional corporation as either a salary or a dividend. If you withdraw funds as salary, the funds will be subject to the personal income tax rate. While dividend taxation is at a significantly lower rate, withdrawing funds as salary allows you to contribute to your tax free savings account (TFSAs) and a Registered Retirement Savings Plan (RRSPs). Ultimately, it is your decision. You decide annually to withdraw funds as a salary, dividend or combination of both to maximize your earnings.
Legal Help with Setting Up Engineer Professional Corporations
Are you an engineer interested in setting up a Professional Corporation? Speak to one our corporate lawyers. At Kahane Law, our corporate team has the experience to assist in structuring your practice as a professional corporation. Additionally, if you are an accountant, doctor, lawyer, optometrist, chiropractor, physical therapist, veterinarian, architect, or a lawyer, and wish to set up a professional corporation, give us a call at 403-225-8810 or email us directly., or email us directly here.