LLC in Canada? The Canadian Equivalent and What to Form

Does Canada have LLCs?

No. No Canadian law creates a limited liability company. The government's registration pages offer a corporation (federal or provincial), a sole proprietorship or partnership, or a co-operative, an incorporated body owned and run by its members (Canada.ca; ISED), and the CRA says the structure you choose affects how you report income and which returns you file (CRA). Ontario's Business Names Act mentions an LLC only as an "extra-provincial limited liability company", one formed under another jurisdiction's laws (section 2.1).

Each province sets its own partnership rules; the limited partnership and LLP rows follow Ontario's, explained below.

Your case needs more than a structure chart if you will leave profit in the business beyond what you live on, if there are two or more owners, if you hold a professional licence, if an owner lives outside Canada, or if the US is involved (US citizenship, US investors, or a US LLC already formed). Gather your expected yearly profit and how much of it you need to take out, the number of owners and what each puts in, your province, and any US connection.

What is the LLC equivalent in Canada?

A corporation is the usual equivalent for limited liability. It is a separate legal entity, and its shareholders are not responsible for its debts: if it fails, they lose at most what they invested (Corporations Canada). The shield has limits: lenders may ask owners for personal guarantees (CRA), and directors can be personally liable, with the corporation, for unremitted payroll source deductions and GST/HST; the CRA can assess them up to two years after they last cease to be directors (CRA: IC89-2).

The trade-off is tax. A Canadian corporation is never pass-through (profit taxed only on the owners' own returns). It files a T2 every tax year, even with no tax payable, within six months after the year ends (CRA: T2 filing; CRA: corporation). It pays its own tax: a Canadian-controlled private corporation (a private corporation incorporated in Canada and not controlled by non-residents or public corporations) pays a federal net rate of 9% on active business income up to the federal business limit of $500,000, plus provincial tax; above that limit, and for any other corporation, the federal net rate is 15% (CRA: rates; CRA: type of corporation). Owners pay personal tax on the salary or dividends it pays them, and its losses stay inside: shareholders cannot claim them (CRA). See how corporations are taxed and, if an owner lives outside Canada, CCPC status for a new corporation.

Pass-through tax exists in Canada only for unincorporated businesses. A sole proprietor reports profit or loss on a T1; a partnership pays no income tax and each partner reports a share (CRA: sole proprietorship; CRA: partnership). No Canadian form gives every owner both full limited liability and pass-through tax, as an LLC's default tax treatment does. The nearest are a limited partnership, for its limited partners only, and an LLP, for some professions.

LLC in the USA vs a corporation in Canada: how do they compare?

The two give owners similar liability protection but are taxed in opposite ways by default, and each country treats the other's entity as a corporation, with one exception shown below.

For how an LLC's tax works in the US, see how LLCs are taxed. For paying yourself from a corporation, see salary or dividends.

Limited partnerships and LLPs: who can use them?

Both are partnerships, so the partnership pays no income tax and each partner reports a share (CRA). They differ in who is protected, and each province sets its own rules. Ontario's are below.

• Limited partnership. An Ontario limited partnership needs at least one general partner and one limited partner, and is formed when its declaration is accepted for filing (Limited Partnerships Act, sections 2 and 3). A limited partner is liable only up to the money and property it contributes or agrees to contribute, but becomes liable as a general partner if it takes part in control of the business (sections 9 and 13). The general partner stays fully liable. A partner can be an individual or a corporation (CRA).
• Limited liability partnership. An Ontario LLP may carry on business only to practise a profession whose governing Act expressly permits LLPs and whose regulator requires minimum liability insurance (Partnerships Act, section 44.2). An LLP partner is not liable for other partners' negligence or for the firm's other debts, but stays liable for their own negligence and that of people under their direct supervision, and partnership property can still be taken for the firm's obligations (section 10). A café or a design studio cannot be an Ontario LLP.

Licensed professionals may also be able to incorporate; see professional corporations.

What is a ULC (unlimited liability company) in Canada?

A ULC is a corporation, not an LLC: its shareholders can be made to pay its debts, the opposite of limited liability. British Columbia, Alberta and Nova Scotia allow them, and none limits what shareholders can be made to pay (BC Business Corporations Act, section 51.3; Alberta Business Corporations Act, section 15.2; Nova Scotia Companies Act, section 9). In Canada it files a T2 like any resident corporation (CRA), and a BC ULC files the BC annual report (BC Registry). Its main use is cross-border: US rules do not automatically treat it as a corporation (26 CFR 301.7701-2(b)(8)(ii)); the effects for US owners, including treaty limits, are in US business expanding into Canada.

How do I open an LLC in Canada, or register a US LLC here?

You cannot form an LLC under Canadian law, but an LLC formed in a US state can register to do business in a province. In Ontario, an extra-provincial limited liability company may not carry on business until it registers its company name, and the law of the state where it was formed still governs its internal affairs and its members' liability (Business Names Act, section 2.1). The Ontario Business Registry lists this as a separate service (Ontario); a new registration costs $60 (Ontario: fees) and lasts five years (Business Names Act, section 4). In British Columbia, the law counts an LLC as a foreign entity, which must register as an extraprovincial company within two months after it begins to carry on business there (Business Corporations Act, sections 1 and 375). Other provinces set their own rules.

Registering settles the name, not the tax. Canada treats a US LLC as a corporation, while the US may look through it to its owners (CRA: IC71-17R6). An LLC that carries on business in Canada files a T2 (CRA: T4012), and one run from Canada may also be resident here, since a company is generally resident where its central management and control is exercised (CRA: residency of a corporation). Either way, because it was not incorporated in Canada it cannot be a Canadian-controlled private corporation or get the small business rate (Income Tax Act, section 89(1); section 125(7)). For a Canadian resident owner, that mismatch can lead to tax in both countries on the same profit. Before forming one, read US business for a Canadian resident; if you already have one, read fixing a US LLC owned by a Canadian.

One owner: sole proprietorship or corporation instead of an LLC?

For one person, the choice that replaces "LLC" is a sole proprietorship or a corporation. A sole proprietor reports profit or loss on a T1 with Form T2125, and the business's risks extend to personal property and assets (CRA). A corporation separates those risks, within the limits above, but adds a T2, an annual return and corporate records.

Whether that is worth it turns on how much profit you leave in the business, not on gross sales; see sole proprietorship or corporation. In Ontario, an individual who does business under a name other than their own must register it (Business Names Act, section 2); see registering a business in Ontario, British Columbia or Alberta.

What are the next steps once I choose a corporation?

1. Federal or provincial. A federal corporation can use its name across Canada; online incorporation costs $200 (Corporations Canada). It must still register in the provinces where it does business; see federal or provincial incorporation. Province steps: Ontario, British Columbia, Alberta, Quebec.
2. Name. Choose a word name or a numbered company; see named or numbered company.
3. Incorporate and organize. Articles, shares, directors and first resolutions; see how to incorporate in Canada.
4. Business number and CRA accounts. A federal incorporation brings an email with the business number within minutes (Corporations Canada); then open the GST/HST and payroll accounts you need; see after you incorporate.
5. Every year. A T2 within six months after the year ends, and an annual return to the corporate registry; a federal corporation files it within 60 days after each anniversary of incorporation (Corporations Canada). For what each costs, see cost to incorporate in Canada.

Two or more owners choosing a partnership instead should read partnership or corporation.

Example

These examples are illustrative; figures are in Canadian dollars.

A Toronto web designer who wanted an LLC

She expects about C$60,000 of profit a year and wanted an LLC to protect her savings from a client claim. As a sole proprietor, she reports the C$60,000 on her T1 with Form T2125, and her personal assets stand behind the business; she can also carry liability insurance. If she incorporates in Ontario or federally, the corporation signs her contracts, files a T2 and pays tax on the profit it keeps; she reports the salary or dividends it pays her. The shield covers the corporation's debts, not anything she guarantees personally. If she needs the full C$60,000 to live on, little profit stays inside to benefit from the corporate rate, so liability and cost may weigh more than tax.

Two Calgary partners opening a café

They expect C$80,000 of profit, split equally. As a general partnership, the partnership pays no income tax and each reports C$40,000; both share liability for the lease and other partnership debts (Alberta Partnership Act, section 11). If they form a corporation and each owns half the shares, the corporation signs the lease, files its own returns and pays them salary or dividends; a landlord or lender may still ask them to sign personally. A limited partnership would still need at least one general partner with full liability (sections 51 and 56), and an Alberta LLP is open only to professions allowed to practise through a professional corporation (sections 81 and 82).

A Vancouver founder with a US LLC

He formed a one-owner US LLC because "Canada has no LLC" and runs it from home in Vancouver, earning C$100,000 of profit. Unless the LLC elected corporate tax, the US looks through it to him. If he is neither a US citizen nor a green-card holder (IRS: tax residency) and none of the business is carried on in the US, he may owe no US income tax (IRS: effectively connected income), but the LLC still files Form 5472, a US information return on its dealings with him, for each year with a reportable transaction such as money he puts in or takes out; missing it costs US$25,000 a year (IRS: Instructions for Form 5472). Canada treats the LLC as a corporation carrying on business here: it files a T2 and, not being incorporated in Canada, cannot get the small business rate. Because he makes its decisions in Vancouver, it may also be resident in Canada; if it is not, he also reports it each year on Form T1134 (Income Tax Act, section 233.4(4)). If he is a US citizen or green-card holder, or the LLC has US business, both countries can also tax the same profit at different times and as different kinds of income. The ways out are in fixing a US LLC owned by a Canadian.

Different for you?

• You are deciding whether to incorporate at all, or when: see sole proprietorship or corporation and get business formation help.
• You have a co-founder: see partnership or corporation and get business formation help.
• You live outside Canada, or have just arrived: see incorporating in Canada from abroad, incorporating as a newcomer or non-resident or, from mainland China, Canadian company for a China-resident founder, and get business formation help.
• You already run a sole proprietorship: see moving a business into a corporation and get business formation help.
• You live in Canada and already own a US LLC: see fixing a US LLC owned by a Canadian and get cross-border tax help.
• You want a US entity to sell to US customers: see US business for a Canadian resident and get cross-border tax help.
• You are a US citizen living in Canada: a Canadian corporation also brings US filings; see American owners of Canadian corporations and get cross-border tax help.
• You are a US owner entering Canada, or weighing a ULC: see US business expanding into Canada and get cross-border tax help.
• You hold a professional licence: see professional corporations and get business formation help.