A limited liability company or LLC, which is a hybrid business structure, combines elements of both a corporation and a partnership or sole proprietorship:
Similar to sole proprietorships or partnerships, an LLC is an unincorporated entity.
From a taxation perspective, an LLC resembles a sole proprietorship or partnership, as business earnings are transferred to owners and investors and included in personal income on tax filings.
Just like a corporation, an LLC offers limited liability, meaning the owner(s) are only accountable for the extent of their investment in the company.
Can You Set up an LLC in Canada?
The Canadian business landscape lacks the presence of the LLC ownership structure. Although setting up LLCs is prevalent among entrepreneurs in various countries such as the United States, the U.K., Switzerland, Chile, Colombia, Italy, Japan, and India, Canadian business owners do not have this alternative available to them.
Forms of Business Ownership in Canada
In Canada, there exist four types of business ownership:
– Sole proprietorship
– Partnership
– Corporation
– Cooperative
If you desire the restricted liability offered by an LLC, the corporation offers a similar level of protection in Canada. Unlike sole proprietorships and many partnerships, corporations offer limited liability.
Limited Partnerships in Canada
The sole alternative form of business ownership in Canada, accessible to the general public and providing restricted liability, is the limited partnership. Within this business framework, the partners possess limited liability based on their contribution to the partnership. Occasionally, a partner’s sole contribution in a limited partnership is financial, and they remain uninvolved in active business management.
Limited liability partnerships (LLPs) also exist in Canada, primarily accessible to professional groups like lawyers, accountants, and doctors. The standards for forming an LLP differ across provinces.
Professional corporations also offer a measure of limited liability. The Canada Business Corporations Act permits regulated professionals, including chartered accountants, certified general accountants, lawyers, certain healthcare professionals, social workers, and veterinarians, to incorporate their practices. These companies must adhere to specific regulations and bylaws 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).
CBES is here to assist you; feel free to contact us for expert guidance.