Difference Between LLC and IBC

 

Tax minimization and simplification of operation just about sum up the use of the foreign offshore limited liability company ( LLC ) for U.S. residents, particularly 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 and satisfies the taxing authorities.

What is a foreign LLC?

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 a corporation, 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. Offshore LLCs typically enter into an operating agreement, which states how the members relate to each other and how the company is managed. While the company is liable for its operating debts, the members are NOT liable for any of the LLC’s obligations.

What are the benefits of an LLC?

The main benefit of this kind of company structure is that it provides a layer of legal separation between the owners of the company, the company itself, and the business it conducts. The foreign LLC can be a sort of “poor man’s 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. Like the offshore grantor trust, the offshore limited liability company 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 company to function as a tax minimization tool since the tax rate can be lower than that of an IBC.

Another benefit of the offshore foreign LLC over the better known IBC 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 IBC (if of course the IBC is not properly structured). But with the offshore foreign LLC 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.

How does an LLC differ from an IBC?

First of all, a Limited Liability Company (LLC) is a registered company which does not issue shares, therefore does not have shareholders. Its owners are known as members. The LLC can be managed by its members or owners. While an IBC cannot conduct business in the country of incorporation, there is no such restriction on an LLC. The liability of the members is limited to the contributions of the member. Distribution of profits or dividends are set out in an operating agreement and not necessarily based on contribution value. The IBC is limited by shares and the shareholders appoint the director for the management of the company. Dividends are determined by the share percentage ownership.

With regard to citizens of the United States, the primary difference between an IBC and a foreign LLC is the manner in which is treated by the I.R.S. and the subsequent tax exposure for either the shareholder or member. 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 LLC can elect to have the taxes flow onto their personal tax return when the LLC elects to be a disregarded entity using IRS form 8832. So, if the personal tax rate of the foreign offshore LLC owner is 20% for that year then the owner benefits in comparison to the IBC tax rate which is 35%.  This is of course assuming one does not maximize their confidentiality whilst setting up said corporation or LLC.

A foreign LLC (such as Nevis) is often far better than that of a U.S LLC.  This is due to the fact that the U.S carries several impediments when opening accounts for both residents and investors abroad.  The freedom and asset protection one receives in a foreign LLC is much great than that which would be received in Nevada or Wyoming (although they too have their own advantages for certain clients).   Nonetheless, for those aiming to maximize their asset protection and offshore freedom, one should lean towards the establishment of an offshore LLC or even IBC.  Your aim should always be to remain offshore.

 

Note:  This article is by no means an endorsement for an LLC over an IBC.  Each solution has its benefits and is subjective to your individual needs.

Contact us today to find out which solution is best for your needs.