What Does LLC Mean and Can You Set Up an LLC in Canada?
Limited Liability Companies Don't Exist in All Countries
Question: What does LLC mean and can you set up a Limited Liability Company (LLC) in Canada?
What Does LLC Mean?
An 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. That is income from the 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?
No, you cannot set up an LLC in Canada as this form of business ownership does not exist here. The LLC is a type of business structure that exists in the United States and other countries but not in Canada.
What Other Countries Have LLCs?
LLCs (or equivalent forms of business ownership) exist in many other countries, including the United States, UK, Mexico, Switzerland, Chile, Columbia, Italy, Japan, India, etc.
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.
See How to Incorporate Your Business in Canada and I've Incorporated a New Company - What Are the Next Steps? for more on how incorporation works in Canada.
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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 he or she is not involved in actively running the business.
If you are considering forming a partnership, you will want to read 10 Questions Partnership Agreements Need to Answer.
Limited Liability Partnerships 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 a Limited Liability Partnership vary from province to province.
And Professional Corporations also exist. The Canada Business Corporations Act allows a number of regulated professionals to incorporate their practices, such as Chartered accountants, Certified general accountants, lawyers, some health professionals, social workers and veterinarians. However, "the ability to practice by means of a professional corporation will depend on whether the profession in question has had the necessary regulations and by-laws enacted" (Ontario Ministry of Government and Consumer Services).
Can a Canadian Business Owner Set up an LLC in the United States?
Yes, but since LLCs do not exist in Canada the Canada Revenue Agency (CRA) treats American Limited Liability Companies as corporations, which can lead to unexpected taxation issues.
For example, the CRA allows a foreign tax credit for U.S. tax paid by a U.S. LLC of 15% of the earnings - any amount of U.S. tax paid above 15% cannot be used to reduce Canadian taxes, possibly resulting in double taxation on part of the U.S. LLC income.
For this and other reasons, it is generally recommended that Canadian companies wishing 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).