The Differences Between an LLC vs. a Corporation in Canada

By Indeed Editorial Team

Published August 3, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

There are many types of business classifications throughout the world. Two of these include classification as an LLC or a corporation. Understanding the differences between these classifications in Canada may help you decide which classification is best for your team. In this article, we discuss the differences between LLCs and corporations and answer common questions about various business classifications.

LLC vs. corporation in Canada

Understanding the differences between an LLC vs. a corporation in Canada is an important consideration to make because, in Canada, LLCs receive all the same classifications as corporations. Although differences exist in other countries, such as the United States, these differences don't apply to Canada. This means that tax exceptions or protections for personal assets that exist under typical LLC laws don't apply either. Furthermore, while you may be able to convert an existing LLC from another country into an LLP in Canada, for example, LLCs are not typically formed in Canada. Rather, you can form a corporation in Canada.

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What is an LLC?

An LLC or limited liability company is a business entity with a unique structure that separates it from corporations and partnerships in certain countries like the United States, the U.K., Switzerland, Chile, Colombia, Italy, Japan, and India, but not necessarily Canada. It operates like a partnership, is taxed like a corporation, and has the same legal protection as corporations in that LLC members are protected from personal liability for business debts.

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What is a corporation?

The Canadian government officially recognizes corporations as independent business entities under the law. Tax laws for Canadian corporations require that all entities pay taxes on all profits made, but also have separate corporate income tax rates. This also means that profits and revenue produced by the business belong to the business and not any individual person.

What makes a company a corporation vs another type of business?

In Canada, a corporation is any business that is incorporated under the Canada Business Corporations Act (CBCA). This includes all businesses operating as LLCs in other countries or as corporations in any country. There are other types of business that you can start in Canada that don't receive a corporation classification, including:

  • Sole proprietorship: A sole proprietorship is a business owned by one person. This is the simplest type of business and is commonly a side activity that earns extra income or a main income for an independent contractor or consultant.

  • Partnership: A partnership is a business that has two or more owners. This structure suits business owners who want to work together with others on larger projects, but who don't want to incorporate.

  • Cooperative: A cooperative is a business owned by its members as individuals, who all share in the profits. It differs from a partnership, where each member contributes their own capital toward the project, and from a sole proprietorship, where the owner is solely responsible for any debts incurred.

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FAQs about corporations and LLCs Canada

Here are the answers to various other essential questions about corporations and LCCs in Canada:

Are there multiple types of partnerships in Canada?

There are three main types of partnerships in Canada:

  • General partnership: A general partnership is a business agreement between two or more parties that grants each partner his or her own share of ownership in the business.

  • Limited partnership: This type of partnership allows some members of the partnership to have special tax benefits and an operating agreement that details the investment allocations, capital contributions, and management responsibilities among the partners. In this partnership, some partners still have full liability for the business.

  • Limited liability partnerships: LLPs protect all partners from liability and in most provinces, LLPs are only available in high-risk industries, such as law, accounting, architecture, or medical care. Provincial legislation governs LLPS, and the protection from liability provided differs based on your province or territory.

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What are the differences between an LLP and an LLC?

LLPs and LLCs are functionally similar types of businesses in many countries, but LLCs gain classifications as corporations in Canada. This means that a business that already exists as an LLC may reestablish itself as an LLP to maintain the same types of protections in Canada. This reestablishment process may be only allowed under certain circumstances, according to the Government of Canada.

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What are the benefits of starting a corporation vs another type of business?

There are many benefits of starting a corporation in Canada, including:

  • Taxes: Corporations can save money on taxation by taking advantage of available credits and deductions in the tax code. Personal revenues generated by corporations are not taxed as salaries, so you can use them to pay for business expenses or reinvest them in the business.

  • Investment for growth: Corporations have a much wider range of options when it comes to raising capital, including the ability to take out loans, get investments from shareholders, or sell stocks and shares on a public stock exchange.

  • Raising awareness: Businesses with a corporation classification may increase their public profile by publicly and formally announcing their incorporation, either on social media or through other media channels.

  • Durability: Corporations often have a longer lifespan than other business structures because the structure allows for more investments in the business and helps the business continue to provide a product or service even if an individual partner leaves the business.

  • Stability: The corporate structure adds more protection from personal liability for each partner. If any one partner is found liable for any issue caused by the company, each shareholder is only liable up to their contribution to the finances of the company, as detailed in their incorporation documents and as determined by legal action.

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What are the benefits of forming an LLC or LLP?

Though you cannot do so in Canada, there are many benefits to forming a Limited Liability Company. Many of these benefits also exist for LLPs, which you can form in Canada, including:

  • Limited liability: LLPs are only businesses that are created from a specific set of parameters that can vary by province or territory. You can structure them in such a way so that the owners of the company maintain limited personal liability for any damages or debts incurred by the company which removes personal liability from each partner and increases stability for the company as a whole.

  • Decreased start-up costs: LLPs generally feature a lower cost of incorporation than corporations, which can save you money during the first stages of starting a business.

  • Multiple owners: LLPs allow for more partners to work on the business as individuals in comparison to sole proprietorships, which can increase the speed and efficiency of your business.

  • More flexible structure: LLPs feature a more flexible structure that allows for internal control over financial transactions, which is advantageous when you are operating different aspects of your business separately in different areas of Canada or even internationally at the same time.

What are the advantages of starting a sole proprietorship?

Here are some advantages of starting this type of business:

  • Greater control: Sole proprietorships provide greater control over the finances of your business, allowing you to make decisions solely on how you want the business to grow and how finances will be handled.

  • Faster: Sole proprietorships generally take less time to set up than corporations due to their lack of compliance requirements or restrictions.

  • Simple: While it is possible with corporations, this structure requires a much less complex legal structure and is often less expensive.

What is the difference between a public and private company?

A public company is a corporation that conducts business activities in the form of publicly trading stocks on an open market, like the New York Stock Exchange. This means that anyone can buy and sell shares of stock in these companies at any time.

A private company is a corporation that conducts business activities through private ownership and operates within a closed market. Private companies are formed based on fundraising goals or credit policy and do not feature the same legal restrictions on shareholding.

What are some advantages to starting a public company?

Some advantages of starting this type of business include:

  • Public companies provide greater liquidity for investors who want to purchase and sell stock at any time throughout the year.

  • Public companies tend to have more public shareholders and investors, which can lead to a higher amount of operating capital for early-stage companies.

  • Public company status provides greater flexibility through the ability to issue shares as legal incentives or employee options without formal registration as a private company.

What are some advantages to starting a private company?

Some advantages of this type of business structure include:

  • Private company owners have greater control over how the business is run and how decisions are made.

  • Private companies don't have the same liquidity requirements for individual ownership, which can be more advantageous for the longevity of your business in some circumstances.

  • There are no public disclosure requirements, which can help with keeping sensitive company information from being leaked to competitors or other parties.

Please note that none of the companies, institutions, or organizations mentioned in this article are affiliated with Indeed.

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