When starting a private practice for the first time, you must keep in mind that you’re not only a counsellor, but also a business owner. Before starting to see clients, you will need to set up your new business. You may find yourself wondering what your options are and how to even get started.
Through a series of topics, we will attempt to help you gain a more clear understanding of what private practice and business ownership may look like for you.
Business Structure: Sole Proprietorship or Corporation?
You will need to decide whether your new business will be a sole proprietorship or a corporation. Initially, you may feel that, since you’re just starting out, you want to keep things small and simple. However, it may be a good idea to think about what your practice may look like in 2, 3 or 5 years. This will help you make decisions regarding your practice that could serve you well once you are more established.
Before deciding between a sole proprietorship and a corporation, let’s look at some differences between the two.
Sole Proprietorship
A sole proprietorship is a good option for many professionals as it is simpler and costs less to set up when compared to a corporation. Filing taxes can also be simpler with a sole proprietorship as revenue is reported as part of your personal tax return. One downside, however, is that revenue reported in a sole proprietorship is generally taxed at a higher rate than in a corporation. This may not be an issue in the early stages of your practice if you have not quite built your client base and are not reporting a high income. In fact, in this case, a sole proprietorship can be advantageous as it will allow you to deduct any business losses from your personal income.
Key points:
- Lower startup costs
- Simpler tax filing – done as part of personal taxes
- Revenue generally taxed at a higher rate
- More complicated to transfer
Corporation
A corporation has higher initial set up costs than a sole proprietorship. More formalized accounting, record keeping and tax filing are also required which contribute to higher ongoing operating costs. That being said, one of the most significant advantages of a corporation is that shareholders are not held personally liable in case of a lawsuit. This means that your personal assets are protected in a lawsuit. A scenario where your personal assets wouldn’t be protected in a lawsuit is if you provide a personal guarantee to secure a loan from a bank.
Another advantage of incorporating your practice is that it makes it easier to transfer your practice. This may not seem important to you early on, but could prove beneficial if you decide to sell or leave your practice at some point in the future. Unlike a corporation, a sole proprietorship can’t be sold as a whole and all its assets have to be transferred separately. Additionally, new bank accounts and CRA business numbers would need to be created.
Key points:
- Generally higher startup and operating costs
- Formalized accounting and tax filing required
- Shareholders’ assets protected in a lawsuit
- Allow for business to be transferable
Regardless of the type of business structure, the important thing to keep in mind is that both types discussed above will allow you to fulfill your primary objective which is to provide care for your clients. Different business structures will provide different advantages and disadvantages as to the functioning and operations of your practice as a business.
After you’ve decided between a sole proprietorship and a corporation, there are a few more things to think about.
Stay tuned to find out more!