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Incorporate your Law Professional Corporation with a Lawyer

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Incorporate your Law Professional Corporation with a Lawyer

The Law Society of Ontario (“LSO”) regulates Lawyers in Ontario. Lawyers are permitted to practice law through a professional corporation. Operating as a professional corporation may be beneficial for Lawyers as it may limit, defer or minimize their tax exposure.

Incorporating a Professional Corporation

When incorporating a professional corporation, it is important to do this properly with a lawyer as the articles of incorporation must  comply with the Law Society Act, R.S.O. 1990, c. L.8 and Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16. Under these acts a Professional Corporation used for the practice of law must be an Ontario Corporation (a “Law Professional Corporation:). A Canada corporation cannot be a Law Professional Corporation in Ontario. Corporations incorporated in a province outside Ontario cannot be a law professional corporation in Ontario. Fortunately, foreign corporations or Canada corporations can be continued (transferred) into Ontario. After the continuation, foreign corporations or Canada corporations can become a Law Professional Corporation in Ontario. Pawlina Law would be happy to help with such a continuance.

Registered Office Address

Each professional corporation needs to have a registered office address. This address cannot be a post office box. Lawyers will often use their home address as the corporation’s registered office address. The registered office address will not be available on LSO’s website. Only practice locations are listed on LSO’s website. However, the registered office address of a professional corporation is publicly accessible when a searcher pays the required $8.00 fee. Some Lawyers will use their practice location as their registered office address. However, it is only advisable to do so when one has control over the mail received as the practice location.

Structure of a Law Professional Corporation

In accordance with subsection 3.2 (2) of the Business Corporations Act, a Law Professional Corporation must satisfy all of the following conditions:

  1. All of the issued and outstanding shares of the corporation are owned in the manner discussed below.
  2. All officers (ie President, Secretary, CEO, CFO) and directors of the corporation shall be shareholders of the corporation.
  3. The articles of incorporation of a professional corporation shall provide that the corporation may not carry on a business other than the practice of law but this paragraph shall not be construed to prevent the corporation from carrying on activities related to or ancillary to the practice of law, including the investment of surplus funds earned by the corporation.

To ensure your Law Professional Corporation is properly incorporated and organized, a lawyer should be retained. Pawlina Law can assist you with setting up your Law Professional corporation. Failing to properly set up your Law Professional Corporation can result in delays in using your professional corporation or having to file costly Articles of Amendment to ensure your corporation complies with the requirements.

Certificate of Authorization for a Law Professional Corporation

Once your Law Professional corporation is incorporated, it must first obtain a Certificate of Authorization before practicing. Practicing without a Certificate of Authorization from LSO or holding out as a professional corporation without a certificate of authorization from the LSO is an offence. A professional corporation cannot register as a licensed member of LSO, nor can it be a registered practitioner of law. Rather, a registrant may obtain a Certificate of Authorization for a Law Professional Corporation which allows it to engage in the practice of the profession. To obtain a Certificate of Authorization, a registrant must email completed applications for By-Law Administration Services to [email protected].

Moreover, to be issued a Certificate of Authorization, a professional corporation must comply with O. Reg. 39/02: Certificates of Authorization which requires (among other things):

  1. A clause in article 5 of the articles of the corporation must provide:
    • The corporation may not carry on a business other than the practice of law, but this paragraph shall not be construed to prevent the corporation from carrying on activities related to or ancillary to the practice of law, including the investment of surplus funds earned by the corporation.
  2. A clause in article 8 of the articles of the corporation must provide:
    • All of the issued and outstanding shares of the Professional Corporation shall be legally and beneficially owned, directly or indirectly, by one or more persons who are licensed to practise law in Ontario (such person or persons being hereinafter individually and collectively referred to as a “shareholder”), but this paragraph shall not be construed to prevent such shares from being transferred to, or otherwise owned by the estate trustee (or by the estate trustees, if more than one) of any deceased shareholder in accordance with the Law Society Act R.S.O. 1990, c. L.8, or the Business Corporations Act R.S.O. 1990, c. B.16, for the purposes of administering the shareholder’s estate, but not for the practise of law.
  3. Each issued and outstanding voting share of the corporation is legally and beneficially owned, directly or indirectly, by a member of LSO.

Holding Company

A Law Professional Corporation is permitted to have a holding company as its shareholder if certain conditions are met. First, the ownership of shares in a holding company must be restricted to law society licensees. This means that family members of a licensee are not permitted to hold shares in the holding company. Moreover, the must be a clause in article 5 of the articles of the holding corporation that the business of the holding corporation is limited to owning shares of the professional corporation. When applying for a certificate of authorization for a professional corporation where a shareholder of the professional corporation is a holding corporation, the articles of incorporation of the holding company should also be included.

Annual Renewal and Updates

Each Certificate of Authorization must be renewed annually prior to December 31 expiry. An annual renewal fee in the amount of $113 ($100 plus HST) must be paid through the lawyer’s Law Society Portal. Shareholders of a professional corporation are required to update the Law Society with any changes to the attributes of a professional corporation.

Naming Your Law Professional Corporation

The name of an Law Professional Corporation must meet the following standards which are described in the Law Society Act, the Law Society’s By-laws, the Rules of Professional Conduct, and subsections (2) to (5) of  Section 1 of O. Reg. 39/02:

    • The name of the corporation must meet the requirements in section 3.2 of the Business Corporations Act and must not violate the provisions of any other Act, which include:
      • The name of the corporation shall include the words “Professional Corporation” or “société professionnelle” and shall comply with the rules respecting the names of professional corporations set out in the regulations and with the rules respecting names set out in the regulations or by-laws made under the Act governing the profession.
      • The name cannot be a numbered company.
    • Additional rules can be found here.

Voting Agreements and Shareholders Agreements for a Law Professional Corporation

Voting agreements or unanimous shareholder agreements are common in the case of small corporations that have only a few shareholder-members as they provide certainty in how the corporation will conduct its affairs. Shareholder agreements often form a critical element in the overall documentation of the business relationships between the incorporators and other persons (such as investors) participating in some capacity in the incorporation of a company. A shareholders agreement usually deals with the following subject matter:

  • Procedural matters
  • How and by whom the Corporation will be Managed
  • Promises of the corporation
  • How shareholders and the corporation will deal with current and future shares
  • Provisions for the resolution of any future disputes between shareholders
  • The location of the business in which the corporation is to engage
  • The contributions that each shareholder is expected to make to the business
  • Withdrawal from membership
  • Buy-sell (shotgun or buyout) provisions
  • Pre-emptive rights to acquire the shares of a departing member of the corporation
  • Addition of new shareholders
  • Restrictions on changing of the business of the corporation
  • Provisions dealing with subscription for share capital and the provision of know-how or other intellectual property to the corporation by its incorporators; and
  • Even such matters as the death, divorce, bankruptcy or retirement of one of the shareholders.

Under subsection 3.2 (4) of the Business Corporations Act, a corporation, agreement or proxy that vests in a person other than a shareholder of a professional corporation the right to vote the rights attached to a share of the corporation is void. Likewise, under subsection 3.2 (4) of the Business Corporations Act, a unanimous shareholder agreement in respect of a professional corporation is void unless each shareholder of the corporation is a member of the professional corporation. Note that there is an exception for the holding corporations, trusts, and non-voting shareholders described above.

Partial Exclusion of Limited Liability

One important difference between a regular Ontario corporation and a Professional Corporation is the partial exclusion of limited liability. With the exception of a few scenarios, due to subsection 3.4 (1) of the Business Corporations Act, a corporation typically insulates shareholders in their personal capacity from corporate liability. However, in a Professional Corporation, shareholders only have limited liability in certain areas. In a Professional Corporation, for the purposes of professional liability, the acts of a professional corporation are deemed to be the acts of the shareholders, employees or agents of the corporation. The liability of a member for a professional liability claim is not affected by the fact that the member is practicing the profession through a Professional Corporation. Thus, a corporation will not protect a lawyer from a negligence claim.

A lawyer is jointly and severally liable with a Professional Corporation for all professional negligence claims made against the Professional Corporation in respect of errors and omissions that occurred while the person was a shareholder of the corporation. Thus, shareholder-professionals remain liable both for their own individual negligence and for the negligence or other breach of other professionals who are employed by the corporation. Conversely, a Professional Corporation can shield a lawyer from other legal claims, such as breach of contract for the Professional Corporation’s commercial lease.

Benefits and Drawbacks of a Law Professional Corporation

There are several advantages to providing professional services using a Professional Corporation. The main advantages are the potential tax planning advantages. For example, having a Professional Corporation can provide opportunities for tax deferral, the use of the lifetime capital gains exemption, and flexibility in remuneration. The tax considerations of a Law Professional Corporation will be dealt with by your accountants or tax planners. Here is a useful article exploring the tax benefits of Professional Incorporation. At times, it might be more efficient to use an RRSP instead of a professional corporation to achieve tax efficiency objectives. Jamie Golombek explores the use of an RRSP versus a Professional Corporation in this article.

Professional Corporations also provide limited protections from creditors and the ability to pay non-deductible expenses from the Professional Corporation. Setting up a Professional Corporation is most useful for professionals who earn more income than they need, allowing them to keep surplus billings in the Corporation. These surplus billings will likely be taxed at a lower rate when retained in the Corporation and can be reinvested in stocks, bonds, or GICs, allowing the professional to accumulate additional wealth in their Professional Corporation which can be paid out to the lawyer at their direction. Other benefits of incorporation include:

  • Ownership is transferable to another person provided that they are a lawyer
  • As long as filings are maintained and the corporation is not dissolved, the corporation’s existence is continuous

Typically, it is a lawyer’s accountant or tax planner that advises the lawyer to complete a professional incorporation. Pawlina Law does not provide clients with tax advice. Only a client’s accountant or tax planner is sufficiently familiar with their tax scenarios to advise them on whether pursuing a professional incorporation is tax efficient for them. Pawlina Law has worked with numerous accountants to assist lawyers with setting up their Professional corporation.

The disadvantages of a law professional corporation are the additional costs and documentation. Professional Corporations typically result in additional legal and accounting costs for the professional during both the set up and on an annual basis. These costs are further explained, below.

How Much Does a LawProfessional Corporation Cost?

There are certain costs which are associated with incorporating. These costs can be broken down into legal costs, accounting costs, and regulatory costs in the following manner:

  • Legal Costs – There are initial legal costs for incorporation and annual costs that will be incurred for corporate maintenance. Our professional fee for a professional corporation is $780.00 + HST and Disbursements. Disbursements are expenses that we incur on your behalf, such as an incorporation filing fee. Disbursements are expenses that we incur on your behalf, such as an incorporation filing fee. More information about what is included is available here. At the time of writing this article, the disbursements are estimated to be $354.41 (inclusive of HST). Our services include everything you need to properly set up your Law Professional Corporation. Your Law Professional Corporation will have annual maintenance requirements. The professional fees to complete this annual maintenance are $350.00+HST per year plus another $100.00+HST if dividends are declared.
  • Accounting Costs – There would also be additional yearly accountant fees around $2,00.00 – $3,000.00 per year. However, some lawyers could reduce their tax bill by tens of thousands of dollars per year.
  • Regulatory Costs – To obtain a Certificate of Authorization, a lawyers must pay LSO a fee of $282.50.

Conclusion

Each law professional corporation is different and will require input from accounting and legal professionals before being created. A well coordinated legal and tax strategy could assist a lawyers in achieving substantial tax savings. Registering a law professional corporation is complicated, but Pawlina Law can assist you with setting up your Professional Corporation. We are happy to have a courtesy call with a lawyers to answer any questions they may have. Please do not hesitate to contact us.

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