Limited Liability Company (LLC) Offshore Formations
What is an LLC - Limited Liability Company?
A limited liability company is a form of business organization, offered in many financial centres around the globe, which grants limited liability for the owner(s). Their business structure merges a partnership’s pass-through taxation with a corporation’s limited liability. Members have the liability protection of a corporation while maintaining most of the taxation benefits afforded by a partnership.
What are international, foreign or offshore limited liability companies?
A foreign (sometimes called an international LLC) is described as a limited liability company that has been formed in one jurisdiction, but which operates in another jurisdiction.
An offshore limited liability company is formed in an offshore financial centre—which typically carries zero to low tax burdens and higher levels of confidentiality and privacy—and operated outside of the borders of the jurisdiction where the entity was formed.
Benefits of LLC Formations
Understanding the Advantages of LLCs
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.
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.
Starting an LLC as a Trust Alternative
Because of the flexibility available in LLC management structuring LLCs can also be used as alternatives to a 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. Sovereign Management & Legal 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 (especially in the U.S.).
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.
Starting an Limited Liability Company for Multi-National Joint Ventures
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.