The establishment of an offshore company is today one of the fastest growing business concepts in the world. The idea of investing in one of the tax havens is proving to be a wise decision and a profitable step. Depending on the number of available shareholders and the capital to be invested, several business entities can be considered when setting up a company.
At the end of this article, you will fully understand the basic steps you should take and the knowledge that will come in handy if you plan to set up an offshore company.
What is an Offshore LLC?
An offshore LLC is a legal structure formed in the jurisdiction of another country. Over the years, the term “offshore” has gained a somewhat negative connotation, leading to the common misconception that all offshore companies are illegal entities where in fact it’s simply a classification used for entities that exist legally under the laws of other countries or territories. Some of the more popular options of host countries include Panama, Nevis, USVI, Belize, Hong Kong, and Seychelles, but it’s technically possible to do it anywhere where the LLC structure is legal.
Most people are likely familiar with the concept of an offshore corporation or international business corporation given its exposure in the media. While offshore LLCs have some similarities with these entities—specifically when it comes to their organizers’ status as non-residents within the registration country—their application is somewhat different. Plenty of IBCs are fully functional as business ventures, for example, as international branches of a US-registered company, but they usually follow a different set of regulations compared to offshore LLCs.
Main Functions of Offshore Companies
Offshore LLCs can obviously be fully operational enterprises, but they are often used for holding accounts, investments, real estate or other assets while retaining personal liability securities that the core structure provides. They can be formed in any country that supports this formal structure.
Protection of Assets
Perhaps one of the main functions of this entity type is enhanced asset protection. Just like domestic LLCs, their offshore counterparts are designed to put a strong protective shield between the owner and the company’s assets. The biggest perk of this system is protecting the individuals that run the enterprise from lawsuits brought against the company itself—usually debt collection chargers and other forms of financially oriented litigation.
But why go through the trouble of setting up an LLC in another country if a domestic entity can offer you similar privileges? In this respect, the biggest draw of offshore LLCs is the increased security that the host country’s legal system provides. After all, it’s much harder to sue an entity that isn’t bound by US laws and doesn’t even operate within the country’s borders since courts in other countries cannot blindly follow the ruling made by another country’s justice system.
The standout feature of this legal structure is its pass-through taxation system. Unlike certain corporations, LLCs are not subject to federal income tax. Instead, all profits and expenses are reported on the individual returns of company owners unless they purposefully elect a corporate tax structure.
Again, the difference between domestic and offshore LLCs is in the greater tax lenience of the latter. When you form an entity of this type in a foreign country, it’s likely you will be exempt from CGT on the assets held by the offshore company until they are reinvested in your home country.
Having extremely low tax rates for international businesses is implemented by many countries like the Cayman Islands as a popular tool for boosting their economy. That said, not all companies may qualify for these rates since they do not apply to controlled foreign corporations and other entities that are not deemed independent.
Advantages & Disadvantages of an Offshore Company
As mentioned before, offshore LLCs may naturally be used for running an actual business abroad, although they tend to be relatively modest in terms of revenue for tax purposes with the annual gross not exceeding $100,000-$200,000 depending on the location. Other beneficial uses for offshore LLCs are:
Foreign real estate and personal assets
If you plan to hold personal investments and real estate abroad, the best way to manage is through offshore LLCs since they provide pass-through tax support, meaning that most of the time, the capital gains generated by your foreign entity won’t be taxed on the company level. Although you still need to report the foreign property to the IRS when it is owned by the offshore LLC rather than the individual, the added asset and personal protection is often worth it for many business owners.
Establishing an individual retirement account
This structure is a popular method of transferring IRAs outside of the US jurisdiction, though the host country must support the single-member LLC business model due to the nature of the transfer. These companies will be owned directly by the IRA for the benefit of the initial owner. Some of the popular eligible options include Belize, Cook Islands, Nevis, and Seychelles. Only vested accounts qualify for the transfer, which is done through a custodian that manages offshore investments and transfers the account to the designated territory. Note that no rollover accounts are allowed.
If you want to set up a foreign trust, using an offshore LLC as the foundation gives you the benefit of increased asset protection. As the trust’s settlor, you appoint the LLC as its manager but it’s you who owns the company itself.
In addition to enhancing your liability and asset protection, this structure also helps you keep onto your personal information. By using your offshore LLC to set up other entities like trusts, you can avoid sharing your personal information.
The obvious drawback of forming an offshore structure is the often massive expenses that come with it. Even if your LLC manages to qualify for US tax reduction, you still need to pay local maintenance fees to keep the company compliant, adjust for currency fluctuation, changes in political circumstances, environmental policies, and more. Some countries also impose minimum requirements for revenue, investments, and ownership such as prior existence of property in the same jurisdiction.
Then there is the matter of the IRS. In recent years, the agency has been attempting to amend the existing laws and impose more stringent regulations on offshore activities with the purpose of curbing tax avoidance and encouraging domestic economic growth.
How to Start an Offshore LLC?
Handling the legal and administrative aspects of offshore LLC formation can be generally less cumbersome than regular foreign incorporation. As long as you choose the host country that supports the existence and regulation of limited liability companies, you can navigate the registration with more ease.
The process itself varies based on the purpose of your foreign company and other factors like the host country’s business regulation laws. Still, you can expect to go through the following steps to complete your formation:
- Hiring a professional consultant: If it’s your first time working with a foreign business, it’s always better to have the help of a certified business expert who could assess the needs of your enterprise and outline each step accordingly;
- Appointing an advisor: A considerable number of offshore investors prefer to handle the formation through an advisor, typically hired through an agency that provides a range of offshore services;
- Choosing a name: The name you choose for your entity should be compliant with the naming requirements of your host country. It can only be used after the approval of the relevant registrar agency, usually called the Company Registry. Some of the basic regulations include:
- Uniqueness: Always run a search through the Company Registry’s database to ensure the name isn’t already taken. It should be both memorable and legally available;
- Avoiding restricted words: Never use signifiers that don’t match your company’s legal structure or purpose. Specifically, avoid words associated with government agencies and other entity types like insurance, trust, university, bank, royal, coop, fund, etc;
- Include company designation: Some countries require offshore LLCs to showcase their structure type through denominations like “Limited”, “PRC LLC”, “LTD.”, “GmbH” “Société Anonyme”, “S.A.”, etc;
- Qualify for a bank account: Most banks will need to verify international customers through the KYC process to prevent financial fraud and money laundering practices. They will typically request the following:
- Valid identification (ID card, passport, etc) or its certified copy;
- Face verification (in person or via facial recognition app);
- Proof of address and current residency;
- Business plan for the company, including purpose, financial structure, etc;
- Filing the documents: This step is a bit more complex since it first involves transferring all documents to your advisor who will then submit them for approval with the local authorities. If the application is approved, the registration process will be completed at the Company Registry.