Practicing dentistry is not always limited to delivering care to patients. If you provide dental services and are not working for another dentist, you are running a business. Whether you are establishing your new practice or looking to optimize how you run your existing practice, this post will help you explore the different options to structure your dental business in Ontario and determine which is right for you.
When setting up your business, there are three different business structures to consider:
- Sole Proprietorships
- Professional Corporations
Today, we will provide an overview of these structures, their advantages and disadvantages, and how to set them up.
What is a Sole Proprietorship?
A sole proprietorship is a business where an individual dentist operates their dental practice as the sole owner. This means that you own and operate the dental practice entirely on your own, and there is no legal distinction between the business and you as an individual.
Advantages of a Sole Proprietorship
- A sole proprietorship is straightforward to set up and easy to manage because it is not subject to the strenuous rules and regulations required for other business structures.
- Because you operate independently, you have complete control over decisions and how the practice is run. In a sole proprietorship, you have the flexibility to work on your terms, such as creating your schedule and your approach to caring for patients.
- All profits generated from the practice belong to you and you alone.
Disadvantages of a Sole Proprietorship
- Unlimited Liability
- A considerable disadvantage of running a sole proprietorship is that the owner has unlimited personal liability for any business debts and obligations. Your personal assets are at risk if the business runs into financial or legal trouble.
- Because a sole proprietorship is running the business in a personal capacity, all income from the dental practice will be considered personal income and subject to personal income tax. The options to deduct expenses or structure the business to make it more tax-efficient are limited.
What is a Partnership?
A partnership is a business structure of two or more dentists coming together to own and operate a dental practice. Unlike corporations, which will be discussed below, partnerships are not separate legal entities. Partnerships are a group of individuals (or entities) who form a relationship to own and operate a dental practice. This relationship is governed by a partnership agreement and Ontario’s Partnerships Act, R.S.O. 1990 and Limited Partnerships Act, R.S.O. 1990.
A partnership can come in different forms, including general partnerships, where partners have equal management authority and liability, and limited partnerships, where limited partners within the partnership may not participate in management and have limited liability.
Advantages of a Partnership
- Combined Resources
- A partnership allows for the pooling of skillsets and resources between partners. This can provide access to resources on a larger scale and lead to more significant practice improvements (e.g., better location, more advanced equipment, more service availability).
- As a partnership is almost entirely governed by the partnership agreement, the structure of ownership, decision-making, and management can be set up in whatever way the partners agree. This also allows for the separation of responsibilities (e.g., HR management, administrative tasks, patient care, etc.), which reduces the burden on each partner.
- Shared Liability
- Unlike a sole proprietorship, where one individual takes on all liabilities, a partnership allows for the sharing of liability among partners, reducing the risk for each individual.
Disadvantages of a Partnership
- Unlimited Liability
- Similar to a sole proprietorship, individuals within a partnership have unlimited personal liability for the partnership’s debts and obligations unless they are a limited partner.
- Conflict Potential
- Creating a comprehensive and well-written partnership agreement is not an easy task. You take on some risks when you enter a partnership because if the partnership agreement is not well-structured, there is potential for disagreements and legal disputes due to unclear expectations.
- Profit Sharing
- The partners must share profits per the partnership agreement.
- A partnership is not subject to income tax itself. Instead, it passes through to the individual partners’ tax returns, similar to a sole proprietorship.
What is a Professional Corporation?
A corporation is an entity which can be used for a wide range of business activities. It is owned by its shareholders and treated as a separate legal entity. Unlike sole proprietorships and partnerships, debts and obligations are ultimately the responsibility of the corporation and not the shareholders personally. Specifically tailored for licensed professionals such as doctors, lawyers, accountants and dentists, a professional corporation represents a particular form of corporate structure.
In Ontario, the Royal College of Dental Surgeons of Ontario (RCDSO) governs the practice of dentistry in the province, including the management of dentists operating their practices through a Dentistry Professional Corporation (DPC). Dentists must adhere diligently to the regulations and standards set forth by the RCDSO.
Advantages of a Professional Corporation
- Limited Liability
- A DPC operates as a distinct legal entity where the dentist’s personal assets are protected from the debts and responsibilities of the DPC. This “corporate veil” is ultimately a shield for the dentist’s personal wealth.
- Professional corporations can offer multiple tax benefits. Corporate tax rates are usually lower than personal income tax rates, and you have access to the most significant tax advantage if you sell your business: the Lifetime Capital Gains Exemption.
- A DPC allows dentists to enjoy a structured method of sharing ownership with fellow dentists, just like a partnership, without the responsibility for the debts and obligations of the corporation.
Disadvantages of a Professional Corporation
- Regulatory Compliance
- DPCs are subject to precise regulatory requirements set out by the RCDSO. While they serve a critical purpose, they can also increase the number of administrative tasks necessary and potentially increase the workload or intricacy of operations.
- The operation and management of a DPC can be more complex when compared to alternative business structures. There are more details and obligations to pay attention to, as well as the necessity of understanding the legal and regulatory landscape.
- Additional Costs
- Setting up and maintaining a DPC may lead to additional expenses, including registration fees, legal fees associated with compliance, and insurance costs.
Business Structure Set Up
The process of creating your business will differ based on the structure of the business you choose, but there are some general things you should consider.
Regardless of the business structure, to practice dentistry in Ontario and own and operate a dental practice, you must be a registered dentist in good standing with the RCDSO.
Name of Dental Practice
Regardless of the business structure, you will need to choose what name you would like to operate your dental practice under. When choosing a practice name, you need to adhere to RCDSO naming regulations, as well as provincial regulations.
For sole proprietorships and partnerships, if you choose to operate under a name other than your own (or the partners), you must register it as a trade name under the Business Names Act, R.S.O. 1990 (BNA). For example, if Dr. John Smith operates a sole proprietorship under “JS Dental Care,” the name must be registered. However, if they operate under “Dr. John Smith”, registration is not required.
For professional corporations, specific rules are set out by the Business Corporations Act, R.S.O. 1990 for the corporation’s name. This includes the following:
- You must include a reference to your name. Whether it’s “Dr. Sarah Smith” or “Dr. S. Smith.”
- You must include the words “Professional Corporation” and a reference to the professional practice. This means it must include the words “Dentistry Professional Corporation.”
- The name must be unique and not too similar to any other professional corporation name. A Newly Upgraded Automated Name Search (a “NUANS” search) is typically used to check availability.
- You must obtain approval from the RCDSO by applying for and receiving a Certificate of Authorization.
Once you have your DPC, similar to the other structures, if you want to carry on your business under a different name, you must register a trade name. Business names can be registered through the Ontario Business Registry online.
If you choose to operate under a partnership, there are some partnership-specific considerations when creating your business:
- Partnership Agreement
- A partnership agreement is an essential aspect of setting up a partnership. This agreement sets out each partner’s role and responsibilities, how finances will be managed, how decisions will be made and more. We recommend a partnership agreement be drafted by experienced professionals because it is not just a legal formality; it is the foundation for running a successful dental practice.
- Business Number
- In Ontario, partnerships must be registered for a business number (BN) with the Canada Revenue Agency to identify the partnership for tax purposes. This can be done using Business Registration Online. Although the partnership itself does not pay income taxes, the tax responsibilities of the partnership must still be reported.
Professional Corporation Specifics
If you choose to operate under a professional corporation, there are some corporation-specific considerations when creating your business:
- Filing Incorporation Documents
- To create the corporation, you must file certain documents with the Ministry of Government and Consumer Services. These documents include your Articles of Incorporation, which sets out the directors and shareholders, as well as other vital details of the corporation.
- Organize Your Minute Book
- A minute book contains all the important corporate documents related to your corporation, including Articles, Bylaws, Resolutions, Registries, etc. For more details on minute books, check out our blog post here.
- Prepare a Shareholders Agreement (if necessary)
- If multiple shareholders are involved, a shareholders agreement will be required. This agreement sets out the rights and responsibilities of each shareholder. For more details on shareholder agreements, check out our blog post here.
As you can see, there is no one correct business structure for all dentists. Whether it is a sole proprietorship, partnership, or DPC, each structure is set up differently and has its own advantages and disadvantages. The right choice is what aligns with you as a dentist, how much risk you are willing to expose yourself to and the financial picture you aim to paint for your practice.
Given the complexities and unique nature of every circumstance, consulting with a lawyer at DMC can assist you in making the right choice for you. With our vast experience with different types of dental practices, we can guide you through the questions necessary to ensure that the structure you choose is right for you and your practice. Send DMC an email or call our team at 416-443-9280, and we can get started today.