Incorporating a Law Professional Corporation in Ontario

September 7, 2022 | By Jana Lambert

Introduction

Lawyers in Ontario that wish to practice their profession through a corporation may only do so through an Ontario Law Professional Corporation.

A Law Professional Corporation is simply a corporation that is subject to the conditions set out in the Ontario Business Corporations Act (the “OBCA”) and the rules and regulations mandated by the Law Society of Ontario (“LSO”). In addition to the rules and regulations which are summarized below, a major difference between professional and non-professional corporations is liability protection.

A lawyer will not be able to limit or shield their personal liability with respect to professional obligations if they operate through a Law Professional Corporation. If there is a claim against the lawyer for professional misconduct, for example, the lawyer and the Law Professional Corporation would be jointly and severally liable to satisfy all professional liability claims and would rely on their professional liability insurance to satisfy such claims.

Restrictions and Regulations

A Law Professional Corporation is subject to the following restrictions/regulations:

Jurisdiction

Lawyers are not permitted to use a federal corporation for their professional corporation. For lawyers licensed in Ontario, a professional corporation must be an Ontario corporation.

Name of Law Professional Corporation

A Law Professional Corporation is subject to strict naming conventions. The name of the corporation:

must adhere to the law firm name guidelines, which are currently found here and must include the ending “Professional Corporation”.

Articles of Incorporation

The Articles of Incorporation of the Law Professional Corporation must include certain restrictions:

Business Restriction in Article 5 of the Articles of Incorporation

The Law Professional Corporation may not carry on a business other than the practice of law or activities which are ancillary to the practice of law, including the investment of surplus funds earned by the Law Professional Corporation.

Restrictions on the Transfer/Ownership of shares in Article 8 of the Articles of Incorporation

All of the issued and outstanding shares of the Law Professional Corporation shall be legally and beneficially owned, directly or indirectly, by one or more lawyers.

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 practice 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 practice of law.

Directors and Officers

Only lawyers who are also shareholders of the Law Professional Corporation can be directors and officers of the Law Professional Corporation.

Holding Companies

Holding companies are permitted to be shareholders of Law Professional Corporations so long as they comply with certain conditions as set out by the LSO. The directors/officers/shareholders of the holding company must be restricted to the relevant licensee(s). Shares in a holding company may not be owned by family members or non-licensees. In addition, the business activity of a holding company must be restricted to holding the shares of the professional corporation. Applicants who intend to use a holding company should submit their draft Articles of Incorporation for the holding company to the LSO for approval before incorporating to avoid costly amendments. Applicants should also inquire directly with the LSO about the process.

Obtaining a Certificate of Authorization

Once incorporated a lawyer must apply to LSO for a Certificate of Authorization. A lawyer is not permitted to practice their profession through a law professional corporation until this certificate has been issued. The Certificate of Authorization may be rejected if the corporation is not compliant with all the restrictions/regulations set out above. A form of the application can be found here.

As part of the application, the lawyer will need to:

Provide information about the name of the Law Professional Corporation and the directors, officers and shareholders.
Provide information about the various practice addresses of the lawyers.
Upload a copy of the Certificate and Articles of Incorporation for the Law Professional Corporation;
Pay the applicable fee to LSO. The current fee is $250.00 (plus HST) and this fee is paid directly to LSO through the Law Society Store at: https://store.lso.ca. Proof of payment (the receipt) must accompany the Application for a Certificate of Authorization.
Send the completed application for a Certificate of Authorization in an email to [email protected] along with the payment receipt and certificate and articles of incorporation attached.
Obtain LSO approval for the articles of incorporation for the holding company, if applicable.

Renewing your Certificate of Authorization

The Certificate of Authorization for a Law Professional Corporation must be renewed every year at any time after October 1 and prior to December 31. If the renewal fee is not submitted by December 31, a notice will be issued indicating that the Certificate of Authorization has expired and the professional corporation is no longer entitled to practice law, provide legal services, or both practice law and provide legal services in Ontario. As part of the renewal process the lawyer will need to do the following:

Complete the renewal application online through the LSO member portal at https://portal.lso.ca
Pay the Renewal Fee, which is currently $100.00 (plus HST).
Only shareholders of the professional corporation are permitted to pay the renewal fee.

Discontinuing your Certificate of Authorization

If a professional corporation has not or will not practice law or provide legal services, the professional corporation must apply for permission to surrender the Certificate of Authorization in compliance with section 10 of By-Law 7.

What are the advantages of a Professional Corporation?

Tax Benefits

The main reason a lawyer will want to incorporate a Law Professional Corporation is for tax savings. By incorporating a Law Professional Corporation, lawyers will be able to take advantage of the small-business deduction that is available on active business income for Canadian Controlled Private Corporations. By forming a Law Professional Corporation, lawyers will also have the ability to leave behind a portion of their business income in the Law Professional Corporation and ultimately defer the payment of personal taxes on this income until the professional decides to pay themselves.

Liability Protection

Although lawyers cannot limit personal responsibility with respect to professional obligations, the Law Professional Corporation does provide liability protection for non-professional obligations that are entered into by the professional corporation. For example, if the Law Professional Corporation is the tenant on a lease and no personal guarantee/indemnity is provided by the lawyer, the landlord would only be able to claim against the Law Professional Corporation in the event of a default under the lease.

Do I need a Section 85 Rollover? Transitioning from a Sole Proprietorship to a Professional Corporation (Rollovers)

Generally speaking, when a lawyer transfers assets from a sole proprietorship to a corporation they will trigger a tax event for the sole proprietor who would be deemed to have disposed of the assets of the sole proprietorship at its fair market value. The Section 85 rollover allows the transfer of the assets from a sole proprietorship to a corporation on a tax deferred basis. Accountants will often recommend that lawyers complete the transfer and file the joint election form in connection with their goodwill and other assets. Whether or not a lawyer will require a rollover is a question for their accountant.

At Ordower Law, we can assist with your incorporation needs. Feel free to give us a call at 416-849-1900. You can also book a call with us below.