What is a Limited Liability Corporation (LLC)?
A limited liability corporation is a business structure that offers liability and tax benefits.
Unlike a corporation, any profits and losses from the business aren’t taxed through the company.
Instead, they pass through to the members who report the amounts on their individual tax returns.
However, the greatest benefit of a limited liability corporation is that it protects members from personal liability.
Creditors cannot pursue them for the company’s debts and liabilities.
Generally, most individuals and entities can become members in an LLC, providing the jurisdiction recognizes the business structure.
However, limited liability corporations aren’t available everywhere.
Can I Set Up A Limited Liability Corporation (LLC) In Canada?
No. This business structure does not exist in Canada.
Canada considers an LLC a corporation.
Business Structures In Canada
Canada recognizes three general forms of business structures.
Variations may exist within these forms for specific business types or in specific situations.
Sole proprietorship is the simplest business structure and the easiest and least expensive to set up.
It is a business owned and run by one person.
Income and losses are reported on the individual’s tax return, as the company does not have separate tax status.
The owner pays tax on income earned at personal income tax rates.
However, they can also claim legitimate business losses against their income.
The owner also assumes all business risks and can be held liable for liabilities and debts.
However, they also have total control over their company and make all business decisions.
Nonetheless, they can’t sell their company in it’s entirety as it does not have a separate status.
In the case of a sale, they would need to sell off just the assets if possible.
The basic definition of a partnership is a company that includes two or more people.
It is an inexpensive and relatively simple business structure to set up.
Owners pool their resources in hopes of turning a profit.
However, the company does not have a separate legal status.
The most common partnership types are general and limited.
General partnerships do not include a legal agreement filed through the courts.
Partners share the profits, management, and financial burden.
Each partner is liable for the actions of the other partners and the debts and liabilities of the entire company.
Conversely, limited partnerships are run by a general partner and often include a legal agreement.
The general partner contributes the majority of the capital, manages the business, and assumes all liability risk for business activity.
However, they also receive the most profits.
The limited partners contribute less capital.
Their only liability is their investment amount, as the general partner assumes company risks.
In both general and limited partnerships, partners claim their share of the profits and losses on their individual tax return and pay tax at individual income tax rates.
Ownership can only be transferred by bringing on new partners.
If the partners change, or the partnership dissolves, owners may need to notify their jurisdiction’s business registration office.
A corporation is the most complex and costly business form.
The company is legally required to keep accurate records and must submit tax installments and regulatory filings.
However, a corporation offers considerable tax, legal, and financial advantages as it is a separate entity.
It can buy and sell property and services and enter into its own contracts.
Owners are not liable for company losses and liabilities.
Profits, losses, liabilities, and assets belong to the corporation.
As a result, the company can deduct legitimate business expenses.
Corporations usually enjoy lower tax rates than individuals too.
They may also qualify for tax credits, capital gains exemptions to further reduce their tax burden.
Corporations are also more likely to obtain credit or raise capital, since their performance is well-documented and records must conform to strict standards.
Can a Canadian open a US LLC?
Yes, Canadians can form a Limited Liability Corporation in the U.S.
However, both Canada and the United States tax worldwide income, which can lead to double taxation.
Canadians must report income earned in the U.S. to the Canada Revenue Agency. If they earn it through a U.S. limited liability company, the CRA considers this income earned through a Canadian resident corporation.
Consequently, they tax the full amount at the corporate rate, even though tax was already paid to the IRS on an individual tax return. As a result, Canadians are double taxed on income earned and there’s no way to avoid it.
Frequently Asked Questions
- Are there LLCs in Canada?
No, this business structure does not exist in Canada. Canada Revenue Agency considers an LLC a Canadian resident corporation.
- What is an LLC in Ontario?
According to ServiceOntario, “there is no statute to establish an Ontario LLC”. This business structure is only available in other countries, such as the United States, Ireland, Spain, the U.K., and others.
The only business structures available in Ontario are sole proprietorship, partnership, and corporation.