Overview and Use Cases of Unlimited Liability Corporations (ULCs)

What Is an Unlimited Liability Corporation (ULC)?

An unlimited liability corporation (ULC) is a Canadian corporate structure that holds shareholders liable for the company’s bankruptcy. Ex-shareholders may also be liable depending on when they sold their stock. Despite this disadvantage, ULCs offer tax benefits to shareholders, making them preferable in certain circumstances.

In the United States, an unincorporated joint-stock company (JSC) is the equivalent of a ULC, with shareholders having unlimited liability for company debts.

If advantageous, a ULC can elect to be treated as a corporation by checking the appropriate box on its tax return.

Understanding Unlimited Liability Corporations (ULCs)

In general, unlimited liability involves general partners and sole proprietors who are equally responsible for business debt and liabilities. This liability is not capped, and owners may have to use personal assets to pay off debts. Most corporations have limited liability structures, capping responsibility to the amount invested in the company.

A ULC is a hybrid incorporation with unlimited liability. Shareholders are protected from liability in most situations, except for company liquidation. Shareholders, as well as ex-shareholders within one calendar year of bankruptcy, can be held liable for the company’s debts.

ULCs are only available for businesses operating in Alberta, British Columbia, and Nova Scotia in Canada.

Key Takeaways

• An unlimited liability corporation (ULC) is a corporate structure used in three Canadian provinces.
• ULC shareholders are responsible for company debts and losses in case of bankruptcy. They receive tax-advantaged treatment on dividends and capital gains.
• ULCs are treated as corporations for Canadian tax purposes but as flow-through entities for U.S. tax purposes.

Advantages of Unlimited Liability Corporations (ULCs)

ULCs have become useful for U.S. investors looking to invest in a Canadian business or for American companies establishing a presence in Canada due to their preferential tax treatment.

For tax purposes in Canada, a ULC is treated as a regular corporation subject to a 25% withholding tax on shareholder dividends and interests. However, the U.S. Internal Revenue Code disregards ULCs as corporations, resulting in profits and losses flowing through to shareholders without corporate tax.

Unlike double taxation faced by corporations, ULCs, like partnerships and other flow-through entities, avoid this issue, making it their primary advantage. Shareholders can also offset their income by flowing through the company’s losses, reducing their taxes. American shareholders can claim foreign tax credits on their tax returns to offset the Canadian withholding tax.

Additionally, ULCs offer the benefit of nondisclosure for businesses. Public reports on money moved through the ULC or tax payment amounts are not required.