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Offshore LLC Limited Liability Company: What is it and Why You Need One

What is an Offshore LLC?

An offshore limited liability company (LLC), is a legal entity created under the laws of a country other than your own. Most common examples are Belize, Seychelles and Panama, however, an LLC can be formed just about anywhere in the world that has the corporate legislation to support it.

Commonly used terms such as Offshore Company or International Business Company (IBC) are the same in principle but are different legal structures and therefore have different, rules and liabilities. They are similar in that they are formed by non-residents in a country outside of where they live, but they are used for different purposes.

The main function of using an LLC is that it gives owners liability. What this means is that it gives members protection from lawsuits or debts taken on from the company. If a member of the company was tp get sued, the LLC would provide liability so that the individuals assets would not be liable.

The best part about an LLC is that no taxes are taken out of its income since it's classed as a partnership rather than a corporation. This means that it acts as a pass-through structure for tax purposes. Taxation is passed onto the members that comprise the entity rather than the entity itself. Another advantage of an LLC has to do with it being able to have multiple classes of ownership, allowing for different levels of liability and rewards.

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Asset Protection

One of the most important functions of an offshore LLC is that it protects your assets by removing them from the reach of creditors. This is because a creditor can only go after what they can find in your name. In order to go after assets held in your name, or assets belonging to you personally, the creditor needs a judgment against you.

This is where an LLC comes in, as an LLC and the individual are regarded as two separate entities. Any assets held by the person are not affected by the structure and vice versa. So if there is a lawsuit against the LLC the assets that you hold would not part of the suit.

Domestic vs. Offshore LLC

The biggest advantage of having an offshore LLC in comparison to a domestic LLC is that forming an entity in a country overseas gives you an added layer of protection if you are sued. Having a structure in a country other than where you reside, in a separate legal system gives you an added layer of security.

Any judgment or lawsuit brought against you would have to be brought forward within the country where the entity is located.  Because each nation-state is a sovereign nation only its own courts can rule in judgments. Just think of how crazy the court system would be if any court in the world could make a judgment.

Countries have their own legal system and rarely recognized the judgment of another court in another country, as local courts have a duty to protect the sovereignty of the state as well as the legal process that governs them.

Tax Haven

If you live in a high-tax country then all of your assets are taxed if they are attached to you personally. Establishing an LLC gives you the possibility of accumulating assets overseas without having to pay capital gains taxes on that income until you bring that money back into the country where you live. However, this all depends on the local laws where you live. If the country where you reside has CFC laws then you may be obligated to pay taxes on foreign entities as well.

Controlled Foreign Corporation Laws (CFC) are laws that attach a beneficial owner to any and all assets held worldwide. Each country has their own unique version that governs foreign corporations so it is best to understand what your obligations are before you proceed.


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LLC vs a 'Normal' Corporation 

The primary distinction between an LLC and a 'normal' company such as a 'C' corporation (USA) or a PLC (United Kingdom), is that the LLC is a tax-neutral vehicle, because it is taxed as a partnership, rather than as a corporation. Thus, using an LLC eliminates tax at the corporate level. In this regard, it is somewhat like a U.S. 'S' corporation or a German GmbH, but without all the restrictions and disadvantages.

So if the LLC itself has no tax payment obligation, then who does? The obligation for any taxes that would otherwise be owed by the LLC bypasses the LLC itself and attaches directly to the members of the LLC. Members are to LLCs what shareholders are to normal companies.

Other companies, as well as individuals and trusts, can be members of an LLC. There are no limits on the number of members or the classes of members that an LLC may have. The important thing to remember is that each member is responsible for his, her or its own pro-rata part of any overall tax obligation of the LLC and that the LLC itself has no tax obligations.

LLC as a Trust Alternative

Because of the flexibility available in LLC management structuring LLCs can also be used as alternatives to an asset protection trust. The manager of the LLC is akin to the trustee of a trust and the members are akin to the beneficiaries of a trust. Offshore Protection can act as a manager of an LLC on behalf of a client who desires to take advantage of our corporate management services.

Substituting an LLC for a trust can change the reporting requirements of taxpayers in onshore jurisdictions. Many providers have abandoned the trust as an offshore planning vehicle because trusts have become a target on onshore legislation and unfavourable court decisions.

Hence many are instead recommending either an LLC or a Foundation depending on what the client requirements are. The income or capital gain of an LLC is not reportable as trust income or gain or as corporate income or gain but is treated as personal income or gain.


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Using Two Offshore Jurisdictions For Multiple Layered Structuring

LLCs are excellent vehicles for structuring joint venture arrangements between project participants from different countries. This is so because the venture can enjoy all of the benefits of incorporation, but each member is liable for his own taxation in his own country.

Moreover, the membership flexibility allows different joint ventures to have different levels of ownership and reward based upon the value that each constituent member brings to the project. The only drawback is that prior to forming LLCs for multi-national joint ventures, the parties must check to see that this hybrid entity is granted the requisite corporate and pass-through (partnership) status in the jurisdictions in which the joint ventures are located. Advice from a local onshore lawyer should be sought.


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***Please Note: If you are a resident of a country that is a signatory of the Common Reporting Standard (CRS) (or a US citizen) your tax reduction possibilities are limited. Due FATCA, CRS, and CFC laws you may not be able to completely eliminate your taxes without moving your residence. While opening an offshore company can increase privacy and asset protection, your tax obligations remans tied to your ownership of overseas entities. Offshore company's are often not taxed in the country where they are incorporated, rather you as the owner are obligated to pay taxes in the country where you reside. Please make sure you know your tax obligations, as we are not tax advisors. Please seek a local tax professional for help regarding your situation. 

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