One of the key initial considerations for establishing a business in Canada is whether the entity will undertake the business directly, as a branch of the foreign entity, or whether to create a separate Canadian subsidiary to carry on the business either via a corporation, a proprietorship, partnership, or joint venture.
The use of a Canadian subsidiary generally limits the liability of the foreign parent corporation to its capital investment in the Canadian subsidiary. In conducting business through a branch, the foreign parent corporation exposes itself directly to all the liabilities of the Canadian operation.
The simplest form of business organization, a proprietorship, exists when an individual carries on business as the sole owner without incorporating. There is therefore no distinction between the proprietorship and the owner as the proprietorship’s income is the owner’s income and the proprietorship’s liabilities are the owner’s personal liabilities.
The most common form of legal entity for businesses is a corporation. Most foreign businesses operating in Canada use a corporation. A corporation is a legal entity that is separate and distinct from the shareholders.
Corporations may be created in Canada under either federal or provincial legislation. Although federal and provincial business corporation statutes are quite similar in most respects, there are some differences that can affect the decision of whether to incorporate federally or provincially. Corporations established under federal or provincial legislation may carry on business anywhere in Canada, but are required to comply with provincial requirements.
Some provinces require that corporations incorporated in their jurisdiction have the majority of director’s resident in Canada, while other provinces have no resident director requirements.
An unlimited liability company (a “ULC”) is a form of corporation where the shareholders of the ULC can be liable for the obligations of the ULC. In this respect, a ULC is similar to a general partnership and is different from the common form of corporation where the corporation’s shareholders are not, in general, liable for the liabilities of the corporation.
For U.S. tax purposes, a ULC can be treated as a flow-through entity. A ULC is a hybrid entity, a corporation for Canadian tax purposes and a flow-through entity for U.S. tax purposes.
A partnership generally exists when two or more individuals or entities carry on business together with a view to making profit without incorporating. In an ordinary partnership, the partnership is not a separate legal entity and all the liabilities of the partnership are the personal liabilities of the partners.
A limited partnership is something of a legal hybrid, providing some of the benefits of a limited liability company along with many of the tax benefits of a partnership. Generally, there must be one or more general partners who are liable for all the partnership’s debts. There may also be any number of limited partners whose liability is limited to the amount they agree to contribute. Generally, a limited partner is not permitted to take any part in the management or control of the partnership’s business. However, a limited partner may participate in certain fundamental decisions, such as the admission of new general partners or its expansion into new businesses. A limited partner may have restrictions on the amount of losses that can be deducted for income tax purposes.
A joint venture is similar to a partnership in that it involves an arrangement where two or more people contribute goods, services or capital to a common commercial enterprise. The main difference of a joint venture vs a partnership is that a joint venture is often considered to be more informal and temporary. The co-venturers in a joint venture do not act as agents for each other. They each receive a share of gross profits but they share only in the expenses related to the specific project. Joint ventures also have different tax rules to partnerships.
A foreign corporation may conduct business within Canada through a branch office after obtaining a license or registering in the province where it carries on business. Since a branch office is not legally distinct from the parent company, the parent will be exposed to the debts, liabilities and obligations of the Canadian operation.