A limited liability company (LLC) is a hybrid form of business that has some of the characteristics of a corporation and some of the characteristics of a partnership or sole proprietorship:
- Like sole proprietorships or partnerships, an LLC is an unincorporated entity.
- Tax-wise, an LLC is similar to a sole proprietorship or partnership. Business flows through to the owners and investors and is added to personal income on tax returns.
- Like a corporation, an LLC provides limited liability. That is, the liability of the owner(s) of the company is limited to the amount of their investment in the company.
Can You Set up an LLC in Canada?
The LLC form of business ownership does not exist in Canada. While it's common for owners to set up LLCs in the United States and other countries (including the U.K., Switzerland, Chile, Colombia, Italy, Japan, and India), this is not an option for Canadian business owners.
Forms of Business Ownership in Canada
Generally, in Canada there are four forms of business ownership:
If you are seeking the limited liability that an LLC provides, the corporation is the best approximation of an LLC in Canada. Corporations provide limited liability that sole proprietorships and most partnerships do not.
Limited Partnerships in Canada
The only other form of business ownership in Canada that is available to the general public and offers limited liability is the limited partnership. In this business structure, the partners have limited liability depending upon their contribution to the partnership. Sometimes the only contribution a partner in a limited partnership makes is financial and they are not involved in actively running the business.
Limited liability partnerships (LLPs) also exist in Canada, but they are usually only available to groups of professionals, such as lawyers, accountants, and doctors. The rules for who may or may not form an LLP vary from province to province.
There are also professional corporations, which provide a degree of limited liability. The Canada Business Corporations Act allows a number of regulated professionals, such as chartered accountants, certified general accountants, lawyers, some health professionals, social workers, and veterinarians, to incorporate their practices. These companies also have to have certain regulations and bylaws in place to qualify for this option.
Can a Canadian Business Owner Set up an LLC in the U.S.?
Yes, but since LLCs do not exist in Canada, the Canada Revenue Agency (CRA) treats American LLCs as corporations, which can lead to unexpected taxation issues. For example, the CRA allows a foreign tax credit for U.S. taxes paid by a U.S. LLC of 15% of the earnings. This means that any amount of U.S. taxes paid above 15% cannot be used to reduce Canadian taxes, which might result in double taxation on part of the U.S. LLC income.
For this and other reasons, it is generally recommended that Canadian companies that wish to set up U.S. subsidiaries do so by creating a regular U.S. corporation. U.S. taxes paid on earnings from a U.S. corporate subsidiary can be fully credited against Canadian taxes. As always, consult an accountant knowledgeable in cross-border taxation prior to expanding your business into the U.S. (or any other country).