Engineers: The Unique Professional Corporation

As the official legal partner for the Ontario Society of Professional Engineers, we receive various inquiries from members. Our most frequently asked question is whether there is a benefit in incorporating as an engineer. This question is typically asked by entrepreneurial engineers who are considering, or have made the decision, to start their own practice.

Section 13 of The Professional Engineers Act, R.S.O. 1990, c.28 (the “PEA”) allows a corporation to hold a certificate of authorization and provide professional engineering services.

A corporation is a business or organization that is separate and distinct from its owners. The owners are referred to as shareholders and, in small companies, often act as the directors of the corporation as well. The key benefits of incorporating are limited liability and tax advantages. A corporation and its shareholders have separate legal identities, meaning the shareholders will not be personally liable for the corporation’s debts, which is the focus of this article. The tax benefits of incorporating include lower tax rates, tax deferral and income splitting. Please consult with your accountant for the specifics of these benefits.

The Business Corporation Act, R.S.O. 1990, c. B.16 (the “BCA”), sets the rights and obligations of a corporation. Section 3.1 of the BCA sets limitations on regulated professionals who practice under a “professional corporation”. Section 3.4 of the BCA states that regulated professionals do not have limited professional liability as the acts of the professional corporation shall be deemed to be the acts of the shareholders. With this section, a significant benefit of incorporating is lost. The obvious intent is to ensure that our society’s integral professionals, such as doctors and lawyers, are held to the highest degree of accountability by limiting the possibility of shielding themselves with corporations where they have failed to meet the requisite standard in providing professional services.

If you consult with a corporate lawyer or accountant on incorporating, they may remind you that professional corporations do not have limited liability. This is a common misconception with engineers. In actuality, engineers have a unique position on limited liability as compared to other regulated professionals. Section 15(9) of the PEA excludes the application of Section 3.4 of the BCA to engineers, so engineers enjoy the benefit of limited liability if incorporated.

If an engineering professional corporation is found liable for providing deficient engineering services, the financial exposure is limited to the corporation’s assets and the limits of its insurance, which is mandatory pursuant to section 34 of the PEA. The shareholder’s personal assets, which include personal property, savings and investments, are protected.

That being said, there are limited circumstances where Courts may strip the status of limited liability to expose shareholders and directors to personal liability. This is referred to as “piercing the corporate veil” and occurs if a corporation is used for illegal, fraudulent or inappropriate purposes. In the case of directors, personal liability may be imposed for improper distribution of funds and assets to shareholders, unpaid employee wages, environmental violations and unpaid taxes.

This article is meant for information purposes only, and does not constitute legal advice. For any questions or concerns, please contact Harp Khukh at harp@corestone.ca.

Original article can be found here.