How to Form an LLC in Canada

An LLC or limited liability company in the U.S. offers legal protection for the members and a business entity to lend credibility to your business. You can't open an LLC in Canada, but you can operate a limited liability partnership or LLP. Another option for Canadians is to open a U.S.-based LLC and operate it from Canada. Read on to learn how to form an LLC in Canada by opening a U.S.-based business entity for tax benefits and better currency conversion.

Can You Set up an LLC in Canada?

In Canada, you can register your business as a sole proprietorship, partnership or corporation. An LLC is not a recognized business structure in Canada. Instead, U.S.-based LLCs are taxed as corporations in Canada. However, you may be able to pass through taxation of a U.S. LLC and file income on your individual tax return in Canada. With an LLC, you can also opt to form an S-corp.

As a Canadian, you can set up an LLC in any U.S. state with a registered agent. You can also set up a limited liability partnership or LLP in Canada. An LLP consists of one or more general partners and one or more limited partners. A Canadian LLP protects investors from liability. However, in many cases, an LLC in Canada (formed in the U.S.) is simpler to manage. 

What is an LLC Called in Canada?

While the LLC business structure doesn't exist in Canada, a similar structure called a limited liability partnership LLP offers comparable liability limitations to an LLC in Canada. 

In Canada, U.S. LLCs usually register under provincial corporation law. For that, they often must fulfill additional requirements.

8 Steps for Setting up an LLC in Canada

If you're ready to create an LLC in Canada to gain the advantages of a U.S.-based LLC, here are the steps. You can also use the best LLC services to help you file everything online. 

1. Choose a Business Name

Choose an LLC name that is unique and memorable. Ideally, the business name will help establish your brand and business offerings. Be sure to check for web domain and social media availability if you need to advertise and build an online presence for your LLC.

In addition, check the Secretary of State's website where you plan to form the LLC to ensure that the LLC name isn't already taken. Remember that you'll need to include the terms limited liability company, LLC or L.L.C. in the name. 

You also can't use restricted words like attorney, university or bank, without meeting additional criteria. And be sure to double-check that the intended name isn't already trademarked. 

Steps for Choosing an LLC Name

• Brainstorm names
• Check to see if the domain name is available
• Check the name on social media sites, and look for businesses with similar names
• Search with the Secretary of State to confirm that no other business is registered with that name
• Use the U.S. Trademark Electronic Search System to ensure the name isn't trademarked

2. Form Your Company with a Registered Agent (RA)

In most states, you are required to have a registered agent. A registered agent is a person or entity with a physical address in the state where the LLC is formed. You can hire a registered agent through online LLC formation services. The registered agent will receive legal notices, tax information, lawsuits and other communication on behalf of the LLC.

You can also ask a family member or friend living in the state where you're registering the LLC to be the registered agent. However, they must be available five days a week and publicize their contact information. For this reason, most businesses choose to hire a registered agent. 

3. Create a Virtual Mailing Address

You'll need a virtual mailing address to create an LLC as a Canadian resident. The registered agent will handle official correspondence, but regular mail will go to the virtual mailing address. Many online agents offer a virtual mailing address service for LLCs to make managing correspondence easier. 

4. Get Your EIN

An Employer Identification Number or EIN is necessary to properly file taxes and allows you to hire employees. You can get an EIN or Federal Tax Identification Number from the IRS. It's how your business will be identified for tax purposes. An EIN allows you to open business bank accounts, qualify for loans, build business credit and open accounts on online platforms like Paypal and Stripe. 

To apply for an EIN, you'll need to fill out form SS-4 and file it with the IRS and return it via mail or fax. Remember to put the U.S. mailing address on form SS-4. Attach the LLC's certificate of formation to add validity to the request. You'll receive the EIN at the address you put on the form. 

5. File Articles of Organization

Articles of organization aren't required in all states, but you'll need to check individual state requirements. In any case, articles of organization can protect the operations of the LLC. You can usually find an outline of the requirements for filing articles of organization. Articles of organization are a legal document that establishes the LLC member's duties, obligations, liabilities and rights. 

At a minimum, the articles of organization should include:

• The name and address of the LLC
• The nature of the LLC's business or activities  
• The name and address of the LLC's registered agent
• The names of the LLC members, managers, and directors, including their addresses and rights

You will need to file the articles of organization with the state where the LLC is registered. This process is usually completed through the secretary of state. 

6. Obtaining Necessary Licenses and Permits

You may need to apply for relevant licenses and permits in the U.S. and for the LLC in Canada to operate legally. For Canada, you can use the BizPal permit and license search based on your location and industry to find required licenses and permits. 

7. Apply for a U.S. Bank Account

Once the LLC is registered and you've obtained an EIN, you can apply for a U.S. bank account. A U.S. bank account will separate business funds from personal funds, further bolstering personal liability protection. Opening a U.S. bank account can also make qualifying for business financing or loans easier. 

8. Stay on Top of Filing Taxes as an LLC

For a U.S.-based LLC operating in Canada, you'll need to meet tax obligations of both the U.S. and Canada. You'll need to file federal and state income tax for the U.S. Certain states don't require state income tax for non-U.S. residents living in Canada. These include Delaware, Alaska, Washington, Florida, Texas, Nevada, Tennessee and South Dakota. Depending on the LLC members' or owners' operations and tax status, you may need to file corporate tax for the LLC in Canada. 

Check with a CPA in the U.S. and in Canada and an expert in U.S.-Canada taxation agreements to avoid double taxation while meeting all compliance requirements for your business situation.  

Benefits of Forming an LLC as a Canadian Citizen

A resident in Canada an LLC offers significant benefits, including:

• Liability protection: Forming an LLC offers personal liability and asset protection to help safeguard your personal finances if the business faces legal issues or financial difficulties.
• Flexibility: LLCs offer flexible management and decision-making. You won't need to comply with the same rigid requirements as corporations.
• Pass-through taxation: LLCs offer pass-through taxation, allowing individual members to report incomes on their tax returns. As a Canadian citizen, you may be able to report your share of the LLC's income on your personal tax return according to applicable Canadian tax laws.
• Business credibility: A legal business structure can enhance credibility and build trust with potential clients.
• Profit distribution options: LLCs can distribute profits; however, the members decide to allocate profits based on the members' ownership interests or other arrangements stated in the LLC's operating agreement. 

Risks of Forming an LLC as a Canadian Citizen

While forming an LLC as a resident in Canada offers a lot of benefits, there are a few downsides to consider:

• Compliance: You'll need to adhere to specific legal and compliance requirements. For example, you may need to register the LLC with the local provincial or territorial government agency. Failure to comply with legal obligations in the U.S. or Canada can result in penalties, fines or the dissolution of the LLC. You should have sufficient legal support to ensure that the LLC meets all legal and regulatory obligations in both countries.
• Tax implications: As a Canadian citizen, you need to ensure compliance with Canadian tax laws and report your share of the LLC's income on your personal tax return. It's essential to stay updated and seek advice from tax professionals or CPAs to ensure proper compliance with all tax filings.
• Governance disputes: Without clear guidelines and agreements among the LLC's members regarding decision-making, profit distribution, voting rights and other aspects of governance, there can be internal conflicts or disputes which can be time-consuming or costly to resolve. 
• Limited liability exceptions: While an LLC typically provides limited liability protection, there are exceptions where personal liability may arise. For example, if you personally guarantee a loan, you may be held personally liable. Therefore, it's important to understand liability exceptions to protect yourself. 

Should You Form an LLC to Use in Canada?

You can gain significant advantages in terms of liability protection, taxation simplicity and governance by forming an LLC. Whether an LLC is the right structure for your Canadian business will depend on your goals, business size and individual considerations. However, in many cases, forming an LLC is a simple, fast way to create a business entity and begin official business operations. 

Frequently Asked Questions