What Is an Unlimited Liability Corporation (ULC)?
An unlimited liability corporation (ULC) is a corporate structure used in Canada that allows shareholders to be liable if the company declares bankruptcy. Sometimes ex-shareholders are also liable, depending on how recently they sold their stock. Despite this disadvantage, the structure of a ULC can be preferable in certain circ*mstances due to the tax benefits granted to shareholders of these companies.
An unincorporated joint-stock company (JSC) is the United States' equivalent to an unlimited liability corporation: JSC shareholders have unlimited liability for company debts.
If for some reason, it finds it more advantageous to do so, a ULC can elect to be treated as a corporation by checking the appropriate box on its tax return.
Understanding Unlimited Liability Corporations (ULCs)
Generally, the concept of unlimited liability involves general partners and sole proprietors who are equally responsible for debt and liabilities accrued by the business. As the word "unlimited" implies, this liability is not capped and can be paid off through the seizure of owners' personal assets (as opposed to limited liability structures, which cap responsibility to the amount a person actually invested in a company, thus shielding private wealth). Most corporations are limited liability structures; that's one of the points of incorporation.
An unlimited liability corporation is sort of a hybrid: It is an incorporated entity with unlimited liability. The ULC shelters shareholders from liability in most circ*mstances, with one major exception: upon liquidation of the company. If that happens, shareholders become liable for the debts of the company. Ex-shareholders can also be held responsible if they disposed of their shares less than one calendar year before the bankruptcy occurs.
Organizing as a ULC is only available for businesses operating in three Canadian provinces: Alberta, British Columbia, and Nova Scotia.
key takeaways
- An unlimited liability corporation (ULC) is a corporate structure used in three Canadian provinces.
- The shareholders of unlimited liability corporations (ULCs) are responsible for debts and losses incurred by the company in case of bankruptcy; in return, they receive tax-advantaged treatment on their dividends and capital gains.
- Unlimited liability corporations (ULCs) are treated as corporations for Canadian tax purposes, but as flow-through entities for U.S. tax purposes.
Advantages of an Unlimited Liability Corporation (ULC)
The unlimited liability corporation has become a useful vehicle for U.S. investors who wish to acquire or put money into a Canadian business, or an American company looking to set up shop in Canada—due to the preferential tax treatment.
A ULC is treated as a regular Canadian corporation for tax purposes. As such, it’s subject to Canada's 25% withholding tax on the payment of shareholders dividends and interests (though the Canada Revenue Agency allows this to be alleviated by deeming the dividend a distribution of capital). However, the U.S. Internal Revenue Code states that the ULC is disregarded as a corporation for U.S. tax purposes, as profits and losses flow through to shareholders—it doesn't pay corporate tax, in other words.
So like U.S. partnerships and other flow-through entities, a ULC avoids the issue of double taxation, its primary advantage. Also, flowing through the company’s losses can help shareholders offset their income, thus reducing their taxes. American shareholders can in addition claim foreign tax credits on their tax returns, offsetting the Canadian withholding tax.
For businesses, another benefit of forming an unlimited liability subsidiary may be nondisclosure. Public reports on money the company moves through the ULC—or tax payment amounts—are not required.
