What is an Unlimited Liability Corporation (ULC)?
An unlimited liability corporation (ULC) is a corporate structure exclusive to Canada that renders shareholders liable if the enterprise declares bankruptcy. Sometimes, ex-shareholders might also face liability, depending on the recency of their stock sale. Although this might appear disadvantageous, the ULC structure can be highly beneficial under certain conditions due to distinct tax advantages granted to shareholders.
In the United States, the equivalent is the unincorporated joint-stock company (JSC) where shareholders possess unlimited liability for company debts. Interestingly, a ULC can opt to be treated as a corporation by simpliciter marking the relevant checkbox on its tax return, if more beneficial.
Understanding Unlimited Liability Corporations (ULCs)
Typically, unlimited liability involves general partners and sole proprietors bearing equal responsibility for the business’s debts and liabilities. As implied by ‘unlimited,’ this liability isn’t capped and encompasses owners’ personal assets, unlike limited liability structures confining responsibility to one’s invested amount.
An unlimited liability corporation merges two lines: It is an incorporated entity entailing unlimited liability. Under this structure, ULC shields shareholders from liability under most situations, save one—during liquidation. If such a scenario arises, shareholders become responsible for the firm’s debts. Furthermore, ex-shareholders could bear responsibility if they liquidated their shares within a calendar year preceding the bankruptcy.
Organizing a ULC is confined to businesses in Alberta, British Columbia, and Nova Scotia.
Key Takeaways
- An unlimited liability corporation (ULC) is distinctive to three Canadian provinces.
- Shareholders of ULCs become responsible for the company’s debts and losses in case of bankruptcy and consequently, they receive tax-advantaged treatments on dividends and capital gains.
- While ULCs are recognized as corporations for Canadian tax purposes, under U.S. tax law, they’re classified as flow-through entities.
Advantages of an Unlimited Liability Corporation (ULC)
ULCs have gained momentum among U.S. investors eyeing Canadian business interests, or U.S.-based companies seeking a Canadian presence, mainly due to its favorable taxation.
A ULC is taxed as a traditional Canadian corporation but benefits from Canada’s 25% withholding tax reduction on shareholders’ dividends and interests, deeming dividends as capital distribution. Moreover, U.S. tax regulations ignore the ULC as a corporation, allowing profits and losses to flow directly to shareholders—circumventing corporate taxes.
Thus, akin to U.S. partnerships or similar flow-through holds, ULCs mitigate double taxation—one of its cardinal perks. Company losses flowing directly to shareholders also assist in alleviating their taxable income. Additionally, U.S. shareholders can claim foreign tax credits, compensating for the Canadian withholding tax.
For businesses, another compelling benefit of ULCs is nondisclosure, as companies aren’t required to release public reports on financial transfers or tax payments through the ULC.
Related Terms: Unlimited Liability, Joint-Stock Company, Limited Liability Corporation, Corporate Structure, Tax Benefits.
References
- Thomson Reuters Practical Law. “Unlimited Liability Company (ULC)”.
