RISKS with ULCs
Contact Neufeld Legal for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
The concept of "incorporation" in business is almost universally synonymous with one key benefit: limited liability, which legally separates the business's debts from the owner's personal assets. However, the Unlimited Liability Company (ULC) - a specialized corporate entity available only in specific Canadian provinces (Alberta, British Columbia, and Nova Scotia) - stands as a striking paradox to this rule.
While the ULC is primarily employed by foreign, particularly U.S., investors to achieve advantageous tax flow-through treatment that avoids double taxation, its structure deliberately compromises the foundational liability protection. This makes the ULC a high-risk proposition for those who do not fully understand its unique legal implications.
The central and most critical risk of the ULC is that its shareholders are personally liable for the debts and obligations of the corporation. Unlike a typical Canadian corporation where shareholder financial exposure is generally limited to their investment in shares, in a ULC structure, creditors have the legal right to pursue the private wealth of the owners (i.e., homes, personal savings, and investments) should the company become insolvent or default on its obligations.
Furthermore, the scope and timing of this personal liability vary significantly by jurisdiction. In provinces like Alberta, shareholder liability is often considered immediate and joint and several, applying during the ordinary course of business, not just upon insolvency. In contrast, in British Columbia and Nova Scotia, the liability is typically triggered upon the liquidation or dissolution of the company if there is a shortfall in assets. Regardless of the provincial nuances, the fundamental danger remains: the ULC structure strips away the corporate veil, creating an existential risk to the personal financial security of its owners and former owners. For any entrepreneur or investor considering a ULC, the non-negotiable tax benefit must be weighed against this intrinsic and potentially catastrophic exposure.
So if you are looking to incorporate a new corporation or deal with the corporate legalities impacting your company, contact our law firm to schedule a confidential consultation with a lawyer experienced in the legal intricacies of business incorporation and commercial business development at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
