Incorporating a Solo Engineering Practice the Right Way

The situation

Beth had spent nine years building an engineering consulting practice out of Parry Sound, mostly on environmental and municipal infrastructure files, working as a sole proprietor with a rotating bench of subcontracted engineers and technicians. By the time she came to Treadstone Law, the practice was billing in the range of $5 million a year, with contracts on the books that made $20 million within a few years look plausible. Her accountant had been telling her for two years to incorporate. Operating as a sole proprietor meant every dollar of profit was taxed in her hands personally at her full marginal rate, and it meant her personal assets sat exposed to any claim arising out of the practice's work.

Beth's title before she went independent had been sales director at a mid-sized engineering firm, which was where she had built the client relationships that became the backbone of her own book of business. She held her licence as a professional engineer throughout, and it was that licence, not the sales title, that made her work regulated. Anyone providing professional engineering services to the public in Ontario has to do so through an individual licence or through a corporation holding a certificate of authorization from the profession's governing body. That distinction — a professional corporation is not the same animal as an ordinary business corporation — turned out to matter a great deal to how Beth's incorporation could be structured.

The ownership question

Beth arrived with two goals beyond the basic incorporation. First, she wanted her spouse, Paulo, a construction project manager, to hold shares in the new corporation. Their accountant had suggested that paying dividends to Paulo instead of taking everything as salary or dividends to Beth alone would spread the practice's income across two tax returns and lower the household's overall tax bill. Second, she wanted to bring in Ines, a fellow professional engineer she had worked alongside for years on joint projects, as a full partner in the business going forward, sharing both ownership and decision-making.

Our review of the governing body's rules for professional corporations surfaced a problem with the first goal. A professional corporation providing engineering services is not permitted to be owned like an ordinary holding company. For most regulated professions, including engineering, the restriction goes further than voting shares — every share, voting or non-voting, must be owned by a licensed member of the profession. Medicine and dentistry are the main exceptions, where specified family members may hold non-voting shares, but engineering's rules allow no such carve-out, and Paulo had no role in the practice that could have brought him within it in any event. Simply put, Paulo could not become a shareholder of Beth's professional corporation the way her accountant had assumed.

Even setting the licensing rule aside, there was a second, separate obstacle. The Income Tax Act contains rules commonly called the tax on split income, which apply extra tax to dividends paid to a family member who is not meaningfully active in the business, unless a specific exception applies. Paulo worked full-time as a construction project manager for an unrelated employer and had never done a day's work for Beth's practice. Dividends paid to him would very likely have been taxed at the top personal rate regardless of his own income, which would have erased most of the income-splitting benefit the accountant was counting on. The professional ownership restriction made the plan impossible; the tax rule would have made it pointless even if it had been allowed.

What we did

1. Reviewed the governing body's rules on professional corporations before drafting anything. Rather than incorporate first and sort out ownership eligibility later, we confirmed in writing what the regulator's rules permitted for shareholders, directors, and officers of an engineering professional corporation, so the corporate structure would be built to pass the certificate of authorization review the first time. Doing this work before any articles were drafted meant Beth never risked filing a structure the regulator would later reject.
2. Explained the tax on split income problem in plain terms. We brought Beth's accountant into the conversation early so the tax and licensing issues were addressed together rather than in sequence, and so nobody was surprised later by a plan that looked good on paper but failed on either the regulatory or the tax side. Walking through both obstacles at once, instead of letting Beth discover the tax problem only after solving the ownership one, saved a second round of disappointment and a second round of billable time.
3. Restructured the ownership conversation around Ines instead of Paulo. Because Ines held her own engineering licence and was prepared to work actively in the practice, she was eligible to be a voting shareholder in a way Paulo never could be. We negotiated the terms on which Ines would come in — an initial minority stake with a path to a larger share tied to revenue milestones, rather than an immediate equal partnership, since Beth was not willing to give up control of a practice she had built alone.
4. Drafted a shareholder agreement addressing the disagreements before they happened. Beth and Ines did not see eye to eye on how quickly Ines's stake should grow or on what would happen if one of them wanted to leave the practice. The agreement set out a vesting schedule for Ines's additional shares, a valuation method for a future buyout, and decision-making rules for major contracts, so the compromise they reached at the table would hold up later.
5. Incorporated under the Ontario Business Corporations Act and applied for the certificate of authorization in parallel. The corporation could not lawfully provide engineering services until the certificate was issued, so we sequenced the articles of incorporation, the initial director and shareholder resolutions, and the certificate application to avoid a gap where the new corporation existed but could not yet bill clients.
6. Documented an alternative role for Paulo that did not depend on share ownership. Paulo remained employed elsewhere, but we set out, in a short memo for Beth and her accountant, the more modest income-splitting tools that were still available to her — a reasonable salary if he ever did perform genuine work for the practice, and standard estate and beneficiary planning — so the door was not closed on every option, just the one that did not fit the rules.

The outcome

Beth's practice was incorporated as a professional corporation, and the certificate of authorization was issued without objection because the ownership structure matched the governing body's rules from the outset rather than needing correction after the fact. Ines came in as a minority voting shareholder with a defined path to a larger stake, and the shareholder agreement gave both of them a clear process for the disagreements that were always going to come up between two engineers with different views on how fast to grow.

The result was a real compromise, not the plan Beth originally wanted. She gained a genuine business partner in Ines and the liability protection and tax deferral that come with incorporation, but she gave up the sole control she had exercised as a proprietor, and the household income-splitting benefit her accountant had proposed for Paulo never materialized. Beth was frustrated when she first heard that the spousal share plan was a dead end, but she said afterward that finding out before the corporation existed, rather than after the regulator rejected an application or the tax on split income rules produced an unexpected assessment, was worth the disappointment. The practice has since taken on two additional contracts in the range that would have pushed revenue toward the top of what she had projected, and Ines's growing stake has given her a real reason to help win them.

Paulo, for his part, said he had never expected to be a shareholder in the first place and was more relieved than disappointed to stay out of a business he had no hand in running. The memo Beth's accountant now keeps on file, setting out the narrower income-splitting tools that remain available to the household, gets revisited every year at tax time — not because the plan changed, but because Beth wanted a documented reminder of exactly why it had not.

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