Incorporating a Dental Practice
Published February 1, 2014
Associated Areas of law
Benefits of Incorporation
Dental professionals are allowed to incorporate in Nova Scotia, provided they comply with the Dental Act (Nova Scotia) and Regulation No. 5 passed pursuant to that act. The ability to incorporate and carry on a dental practice through a company provides a number of options unavailable to an unincorporated dentist. We have highlighted some of the benefits of incorporating below.
Prior to being able to incorporate, dentists were forced to collect their income whether then needed it or not. As a dentist’s billings improve and their personal debt is paid down, a dentist is left with high personal income and high personal tax when not all amounts earned are needed. The ability to incorporate opens up the option to delay receiving personal income. The company earning the income can retain funds that the dentist doesn’t need and no additional tax is paid until the funds are needed.
While tax deferral is beneficial to most business owners, it is particularly useful to dentists as income can be variable depending on the cases treated in any given year. In high income years, the company can retain the excess income paying out only what is needed to the owner (or their family) and retaining the rest for low income years. An individual does not have the option to defer income.
The result is that when a self-employed individual makes more than they need, incorporating will allow lower overall tax to be paid and the owner can rely on more predictability in their income stream. Some of the other advantages are:
- After-tax dollars can be transferred to a connected holding company tax-free.
- With the lower tax rates, more after-tax dollars are available to invest.
- Investments can grow and no additional tax is paid until the gain is realized or additional funds are removed from the company.
Lower corporate tax rate
Individuals pay tax based on marginal tax rates. After each threshold amount is passed, the next dollar earned is taxed at a higher amount. At lower income amounts, individuals pay no tax, with the rates gradually increasing until reaching approximately 54% in Nova Scotia.
A company, however, pays a low fixed rate of tax on the first $350,000.00 of profit. Essentially a company receives approximately $0.865 from each dollar of profit. While individuals pay additional tax on the funds that the company pays out to them, the overall tax paid through directing the income through a company is still lower than it would have been had it been received directly by the individual.
Repayment of Borrowed Money Used in the Business
If a dentist buys a practice personally, the dentist must also personally repay the loan to the bank after taking the money into their personal income and paying tax either as a result of revenue from the practice or as a personal salary or dividend from a company owned practice. Each of these methods uses after tax personal dollars to repay debt. If instead a company buys the practice, if structured correctly, the company would repay the loan and get the advantage of the lower rate of tax discussed above. This provides greater remaining funds to repay the debt or to distribute to the practice owner.
If you support others, using a company will allow you to income split with people over the age of 18 by way of dividends. Because of the different marginal tax rates paid by individuals, using a company to manage payments can offer a tremendous tax saving. Even if a couple requires all of the income for their day to day needs, tax savings can still be obtained through incorporating. The income of the self-employed individual can be directed to the company and then redirected to the individuals in a more even manner.
In many cases, the individuals receiving the funds will pay no tax at all. For example:
In the top marginal tax bracket, you personally would have to earn about $10,000 in order to give your child $5,000 for tuition payments. A company will only pay about $1,350 of tax on that same $10,000 earned and your child will likely be able to receive the remaining amount tax free.
A company is separate from its owners. While directors and officers make decisions for a company, at law it is its own person. This allows you to separate your personal life and your business life and can provide you with creditor protection. Most notably:
- Shareholders are not liable for the debts of the company.
- Assets owned by an individual are not exposed to a company’s creditors and company assets are not exposed to an individual’s creditors.
Factors to Consider Before Incorporating
There is no one size fits all incorporation. Incorporating a business adds a level of complexity, additional accounting and legal costs and additional administrative work to a business. After the start-up costs, there are ongoing maintenance costs each year. It is important to ensure that incorporating makes sense based on your particular circumstances. Some important factors to consider are:
- Will you require all of the profits from your business for personal or family expenses?
- Are there other individuals that you routinely support with the business, other than your employees, and do these individuals have other significant sources of income?
- Are you looking to invest your excess funds?
- Is protecting your personal assets from your business liabilities desirable?
- Are you borrowing a large sum of money to purchase an active business?
If you answered yes to any of these questions, incorporation may be useful to you.
The potential benefits of incorporating can be very valuable; however, it is important to consult with advisors before doing so. The corporate structure should be designed with your personal circumstances in mind and in a tax efficient manner. While the examples above do not apply in all situations, an advisor can help you determine when incorporating is appropriate. Patterson Law has a number of lawyers with extensive experience incorporating businesses. For more information please call us or visit our website.
REGULATORY REQUIREMENTS FOR COMPANIES PRACTICING DENTISTRY
If incorporating is right for you, it is important to ensure that you have read and understand the specific rules that apply to incorporated dental professionals. Under the Dental Act (Nova Scotia) and its associated regulations, a company will only be issued a permit to practice dentistry if:
- A majority of the officers and directors are licensed dentists.
- A majority of the voting shares of the company are beneficially held by one or more licensed dentists.
- The name of the must be acceptable to the Provincial Dental Board.
In addition, the Provincial Dental Board has a licensing form that must be completed and submitted.