Offshore LLC Versus International Business Company – Offshore Limited Liability Company Advantages
Tax minimization and simplification of operation just about sum up the advantages of the foreign offshore LLC (limited liability company) for U.S. residents, especially with the latter benefit being true for people of any nationality. Furthermore, when used with an offshore grantor trust this combo assures excellent asset protection also and satisfies the taxing authorities. But first of all, what is an offshore Samoa , who is it good for, and how does it differ from the more popular international business company?
A foreign offshore LLC ( limited liability company or limited life company in some jurisdictions ) is an unincorporated business entity which is a cross between a partnership and a corporation. Like an international business company, it protects its members from personal liability for the obligations and debts of the entity they are conducting business through. But like a partnership, the expenses and income flow directly through to the individual members. LLCs typically enter into an operating agreement, which states how the members relate to each other and how the company is managed. While the offshore limited liability company is liable for its operating debts, the members are NOT liable for any of the LLCs obligations.
The main benefit of an offshore LLC structure is that it provides a layer of legal separation between the owners of the foreign offshore limited liability company, the company itself, and the business it conducts. The offshore LLC can be the “poor mans grantor trust” in that it provides fair asset protection to the person with modest assets to protect but not enough money to justify purchasing an offshore grantor trust which typically costs about $2,000 and $1500 per year after the initial purchase to maintain. But like the offshore grantor trust, the offshore foreign LLC when filed as a disregarded entity using form 8832, will allow profits from the assets it holds to flow onto the 1040 tax return of the U.S. owner. This allows the foreign company to function as a tax minimizer since the tax rate can be lower than that of an international business company ( ibc ).
Another benefit of the foreign offshore LLC over the international business company is that a person or entity can get a court order that allows it to seize the stock certificates of the IBC and thereby the creditor gains control over the assets of the foreign company. But with the foreign offshore limited liability company, if a creditor claims a judgment against a member, they are only entitled to a charging order. The charging order gives the creditor the right to receive distributions from the offshore LLC that the member would have received. But these profits become available only if the other members elect to make the distribution. The charging order does not give the creditor the right to obtain the voting or management rights. So the members can decide not to make a distribution and the charging order remains ineffectual and the member’s assets are protected.
For the U.S. person the primary difference between international business companies and foreign offshore LLCs is the way they are treated by the I.R.S. and their subsequent tax exposure for either the shareholders or members. At the end of 1996 the U.S. elected that both domestic and foreign corporations were to be taxed at the rate of 35% and could not elect to be taxed otherwise. In contrast, the sole member of the offshore limited liability company can elect to have the the taxes flow onto their personal tax return when the offshore LLC elects to be a disregarded entity using IRS form 8832. So, if the personal tax rate of the offshore LLC owner is 20% for that year then the owner benefits compared to the IBC tax which is 35%.
The foreign offshore LLC as a stand alone disregarded entity for tax minimization purposes is adequate for the lower capitalized individual who wants to protect their assets and can not justify spending money on a foreign offshore grantor trust. But it is not recommended as an entity by itself for those with a sizable amount of assets. The use of an offshore grantor trust as the majority owner of the offshore LLC will give the added asset protection it needs for those who have a sizable amount of assets in their LLC. This addition of the offshore grantor trust will also allow taxation minimization to be a feature of the structure since a foreign offshore grantor trust allows the settler of the trust to have taxes flow onto their 1040 tax return at a lower rate than an international business corporation is afforded.