LLC in Canada: What Canada Uses Instead of an LLC

No. Canada doesn’t have a limited liability company. The LLC is a US form that exists under state statute, and Canadian law gives you a sole proprietorship, a partnership, a corporation or a co-operative instead, plus the unlimited liability company (ULC) in Alberta, British Columbia and Nova Scotia. If what you want from an “LLC” is limited personal liability, the Canadian answer is a corporation. If the business also touches the US, our cross-border business structures guide compares the two-country options.

Does Canada have LLCs?

No. The IRS describes an LLC as “a business structure allowed by state statute,” which makes it a creature of US state law. The federal small-business guide for Ontario lists four structures, sole proprietorship, partnership, corporation and co-operative, and none of them is an LLC.

Here’s the source language. The IRS LLC page says “Each state may use different regulations,” which is US state law talking. FedDev Ontario’s business structure guide says “There are four types of business structures in Ontario: sole-proprietorship, partnerships, corporations and cooperatives.”

So when someone asks how to “get an LLC in Canada,” what they usually want is one of two things. Either they want the liability shield an LLC gives a US owner, which in Canada means incorporating. Or they’ve read that LLCs are simple and cheap in the US and want to form one there while living here, which is a different question with a tax problem attached (covered below).

What is the Canadian equivalent of an LLC?

A corporation. It’s a separate legal person that limits your personal liability, which is the job most people want an LLC to do. The big difference is tax: a Canadian corporation pays its own income tax, while a single-member US LLC is by default ignored for US income tax and its profit lands on the owner’s return.

The FedDev guide puts the corporation’s core feature plainly: “A corporation is a legal entity that separates the business from its owner/operator,” and “Your personal liability is limited.” For sole proprietorships and partnerships it says the opposite: “You and your partners are personally liable for the business,” and “Your income is taxable at your personal rate.”

On the US side, the IRS says “an LLC with only one member is treated as an entity disregarded as separate from its owner, unless it files Form 8832 and elects to be treated as a corporation,” and an LLC with two or more members “is classified as a partnership.” That’s why “LLC” and “corporation” aren’t interchangeable once tax enters the picture.

Structure	Owner’s personal liability	Canadian tax treatment	US tax treatment for a US owner
Sole proprietorship	Personally liable	Business income goes on your own T1, lines 13500 to 14300	Not an entity; the income is the owner’s own
Partnership	Partners personally liable	Each partner reports their share on their own return	A foreign eligible entity; default is partnership if at least one member lacks limited liability
Corporation (federal or provincial)	Limited	Separate taxpayer, resident in Canada if incorporated here; a CCPC can claim the small business deduction	A Canadian “Corporation” or “Company” is on the IRS per se corporation list, so it’s always a corporation
ULC (Alberta, BC, Nova Scotia)	Unlimited (the statute’s rule differs by province)	Still a corporation for Canadian tax	Excluded from the per se list; a single owner gets disregarded status by default, and it can elect otherwise
US LLC with a Canadian-resident owner	Limited under state law	Treated as a corporation by the CRA	Disregarded (one member) or partnership (two or more) by default

The partnership row comes from Treas. Reg. 301.7701-3(b)(2), the corporation row from the per se list in Treas. Reg. 301.7701-2(b)(8), which names “Canada, Corporation and Company.” The CRA’s line-reporting rule for self-employment income is on its sole proprietorships and partnerships page. Canadian residence for a corporation comes from ITA 250(4)(a): a corporation incorporated after April 26, 1965 is deemed resident if “it was incorporated in Canada.”

What is an unlimited liability company (ULC)?

A ULC is a Canadian corporation whose shareholders don’t get limited liability. Alberta, British Columbia and Nova Scotia allow them. A US owner reaches for one because the US entity rules turn on whether the owners are personally liable, so a ULC can be a flow-through for the IRS while staying a corporation in Canada.

Each province’s statute sets the shareholder exposure differently:

• Alberta. Under Business Corporations Act s. 15.2(1), the shareholders’ liability for “any liability, act or default of the unlimited liability corporation is unlimited in extent and joint and several in nature.” A former shareholder is off the hook unless an action is brought within 2 years of leaving.
• British Columbia. Under Business Corporations Act s. 51.3, shareholders are jointly and severally liable to contribute if the company liquidates, and for its debts after dissolution.
• Nova Scotia. The Companies Act, s. 9(c) defines “a company not having any limit on the liability of its members” as an “unlimited company.”

Why bother? The IRS per se list that makes every other Canadian corporation a corporation carves the ULC out. Treas. Reg. 301.7701-2(b)(8)(ii)(A)(1) excludes “a Nova Scotia Unlimited Liability Company (or any other company or corporation all of whose owners have unlimited liability pursuant to federal or provincial law).” Once it’s off the list, it’s a foreign eligible entity, and under 301.7701-3(b)(2)(i)(C) its default is “Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.”

Canada doesn’t follow the US label. A ULC is still incorporated in Canada, and the Income Tax Act says “corporation includes an incorporated company” (ITA 248(1)), so the CRA taxes it as a Canadian corporation. That’s a hybrid in the other direction, and the treaty has a rule aimed at it: Article IV(7)(b) can treat an amount as not paid to a US resident where the paying Canadian entity is fiscally transparent under US law and that changes the US treatment. Whether it bites on a given payment is a facts question, which is why ULC planning is done before the first dividend is paid.

Should I incorporate or stay a sole proprietor?

It depends on how much profit you leave in the business. A Canadian-controlled private corporation pays a low combined rate on active business income up to its business limit, so profit you don’t need to live on is taxed less while it stays inside. Profit you pull out each year gets taxed personally either way, so incorporating mostly helps when there’s money left over.

The numbers come from the CRA’s corporation tax rates page: “For Canadian-controlled private corporations claiming the small business deduction, the net tax rate is 9%,” against 15% after the general reduction. Provinces add a lower rate on the same income: the page lists 2% for British Columbia and 3.2% for Ontario. The business limit is $500,000 under ITA 125(2), shared with associated corporations.

Two conditions catch people:

• CCPC status. The CRA’s list of corporation types requires, among other things, that the corporation “is not controlled directly or indirectly by one or more non-resident persons.” A company controlled by a non-resident doesn’t get the 9% rate.
• Personal services business. ITA 125(7) excludes a “personal services business” from active business income. That’s the incorporated employee: a worker who would “reasonably be regarded as an officer or employee” of the client but for the corporation. A freelancer with one client who looks like an employer should have that tested before incorporating.

Can I use a US LLC if I live in Canada?

You can form one, but it usually works against you. The IRS ignores a single-member LLC and taxes you on the profit as it’s earned, while the CRA treats the same LLC as a corporation and taxes you again when money comes out. The two taxes often don’t line up for a foreign tax credit.

The CRA stated its classification in Income Tax Technical News No. 38: after looking at US LLCs, S corporations and two other foreign forms, “we have concluded that these entities are corporations for Canadian tax purposes.” The mechanics of the double tax, and the fixes, are in why a US LLC is a tax trap for Canadian residents and the disregarded-entity mismatch explained. If you’re starting a US business from Canada, owning a US business as a Canadian covers the US corporation and branch routes.

The reverse case is different. A US person who moves to Canada and already owns a Canadian corporation has its own set of elections, and the check-the-box guide explains why a regular Canadian corporation can’t simply elect out of corporate status.

How do you set up an LLC in Canada?

You can’t set one up, but you can get the same liability protection by incorporating. The steps: pick the structure, register or incorporate it federally or with your province, get a business number from the CRA, and add the program accounts you need, like GST/HST or payroll.

Here’s how the CRA’s business number page lays it out:

1. Choose the structure. A sole proprietorship or partnership registers quickly; the FedDev guide notes that in Ontario “You must renew your registration every 5 years.” A corporation costs more to set up and needs annual filings and corporate records.
2. Incorporate federally or provincially. For federal incorporation through Corporations Canada, the CRA says “Once your federal incorporation is approved, you’ll get a business number (BN) and your corporation income tax (RC) program account.” For a provincial corporation, “you must start the process with the province or territory where your business primarily operates.”
3. Get a BN if you’re unincorporated and need one. “If your business is unincorporated, you only need a BN when you register for program accounts with the Canada Revenue Agency (CRA).”
4. Add program accounts. “If you need other CRA program accounts like GST/HST or payroll, you can register for these accounts with the CRA after you get your BN.”

The federal-or-provincial choice is mainly a corporate law decision, so get it right with whoever forms the company. For the Canada-versus-US comparison when the business crosses the border, see incorporating cross-border: Canada vs US, and for what CCPC status unlocks, the CCPC guide.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.