An LLC Operating Agreement is a legal document that outlines the ownership and member duties of your Limited Liability Company (“LLC”).


This agreement allows you to set out the financial and working relations among business owners (“members”) and between members and managers.


An LLC operating agreement customizes the terms of an LLC according to the specific needs of its owners. It also outlines the financial and functional decision-making in a structured manner. It is similar to Articles of Incorporation that govern the operations of a corporation. To take full advantage of having an LLC, you should go one step further and write an operating agreement during the startup process. Many tend to overlook this crucial document since it is not a mandatory requirement in most LLC jurisdictions; it is nonetheless considered a crucial document that should be included when setting up a limited liability company.


The operating agreement is thus a document which spells out the terms of a limited liability company (LLC) according to the members. It sets forth the path for the business to follow and brings in more clarity in operations and management. An LLC operating agreement is a 10- to 20-page contract document which sets up guidelines and rules for an LLC.


The document, once signed by each member (owners), acts as a binding set of rules for them to adhere. The document is drafted to allow owners to govern the internal operations according to their own rules and specifications. The absence of this document means that your business has to be run according to the default rules of the LLC Jurisdiction.


Even if an Operating Agreement is not required in your preferred LLC jurisdiction, it is strongly recommended to have one:

•            If you have business partners (Multi-Member LLC):

An operating agreement will help prevent misunderstandings by setting clear expectations about partner roles and responsibilities.

•            If you are the sole owner of an LLC (Single Member LLC):

Creating an operating agreement brings credibility to your LLC. This helps to ensure courts uphold limited liability status of your LLC.


The form and contents of operating agreements vary widely, but typically an Operating Agreement will typically cover 7 areas/topics: Organization, Management and Voting, Capital Contributions, Distributions, Membership Changes, and Dissolution.


Article I: Organization

The first section of the operating agreement deals with the creation of the company. It covers when the company is created, who the members are, and the structure of ownership. If there are multiple members, they may all have equal ownership or different amounts of “units” of ownership.


Article II: Management and Voting

This section addresses how the company is managed and how the members vote.

•            The company may be managed by the members or by one or managers that are appointed by the members, and the operating agreement specifies what authority the members or more have over company affairs.

•            The company may choose to make decisions though a voting process. Votes may be allocated among the members in any number of ways, including one vote per member, one vote per unit of ownership interest (if the company ownership is described in terms of units), etc. The operating agreement may specify what amount of votes is required for particular actions by the company.


Article III: Capital Contributions

This section covers which members have given money to start the LLC. It also discusses how additional money will be raised by members. For example, an LLC can choose to issue ownership “units” in exchange for money.


Article IV: Distributions

This section provides how the company’s profits and losses are shared among members. This might include money, physical property, or other business assets.


Article V: Membership Changes

This section describes the process for adding or removing members. It also states if and when members can transfer their ownership of the company. For example, the company will want to specify what happens if a member dies, a member goes bankrupt, two members divorce, etc.


Article VI: Dissolution

This section of the operating agreement will explain the circumstances in which the company may be or must be dissolved. This is sometimes called “winding up” the affairs of the company.


Other Topics

In addition to these six key sections, operating agreements may address any number of other topics. This depends on circumstances of a particular company. For example, members may wish to include requirements for periodic meetings, restrictions on check signing, or explain how disputes within the company will be handled. Keep in mind that your operating agreement can be updated at any time through a process of your choice.


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Anyone who has ever been in business knows that it’s all well and good to have a great product but unless you can introduce the product (or service) to people or businesses who might want to buy the product (or service) you’ll wind up going bankrupt very quickly.


Once way to generate sales is to approach qualified leads direct, ie persons who you know for sure might be interested in buying or who would definitely have need to buy a product like yours.


So how do you generate these leads?


Data mining is often the answer. That is you search the nett for persons or businesses who you know have regular need of such product.


There are specialized business on the nett who will do this for you. That is there are firms who will find qualified sales leads for certain product or services and then either sell the prospective client list (ie an entire database including names and contact details of prospects/leads database) to you or they will allow you to utilize the data (ie to connect with the qualified leads) and then charge a percentage or fee for each sale generated by the provision of the qualified lead.


If you are in the  business of datamining or lead generation you’ll be pleased to know that such a business lends itself well to an “Offshore” Corporate structuring Plan.


In principle here’s how it can work:


  1. An offshore company (commonly an International Business Company “IBC”) is incorporated in a country that either has no Company tax or which has a territorial tax system (ie it only taxes income sourced inside the country of incorporation.
  2. The Company would be seen to managed and controlled from Offshore (ie the Company’s Director/s would be based in a zero tax jurisdiction)
  3. You design a website to be the shopfront of your business
  4. Given that sales leads and databases can be supplied by way of soft files there should be no need to have any physical store or office. That is your business will be web-based.
  5. The IBC owns/operates the web based business (eg ownership of the web-domain and the website/artworks or trademark/s or any sole distributor rights are held by or transferred to the IBC)
  6. An Offshore account (which received payments via a merchant account) is set up in a nil tax banking centre
  7. Ideally the server is located in a country which does not share data or tax business on the basis of server location (eg Iceland).
  8. Your product is offered and marketed online. Customers find you on the internet.
  9. Your terms and conditions (ie your customer contract or order form) would/should have special clauses included noting that the situs of the contract is “Offshore”. Simply put you would have special terms providing that the bargain has been struck “Offshore” (ie in the nil tax jurisdiction/s wherein the Company’s Director/s is/are based)

10.Customers order your services online and contract with and pay the IBC. The Services are delivered via the website or via your website’s domain email account/server

11.All monies generated from such sale are banked free of tax in the first instance.

12.You or your local company could/would be contracted by the IBC to manage sales/delivery of product/website maintenance/whatever.

13.You would invoice the IBC periodically (eg monthly) for this service which income would be assessable income in your home state – though a smart Tax Accountant should be able to assist you to claim a series of expense against this income (eg home office, equipment, travel, phone/internet/utilities etc) to significantly reduce the amount of tax payable on this income.

14.Often there is some kind of intellectual property (“IP”) created or behind the website based business (even if it’s just the website/design). It may be advantageous to you down the track if ownership of the business and the IP were held by 2 different entities. What you can do there is set up a 2nd IBC to own the IP. The first IBC (ie the Trading Company) pays license fees periodically to the 2nd IBC which fees wold be receipted tax free. This could be advantageous if you wanted to bring ownership of the web-business onshore or if you wanted to sell the business but keep a passive (potentially tax free) income stream

15.Ideally once you start to grow you and to add substance you would be wise to set up your MD/Board and or a sales team onshore to take orders and receive income in a low tax onshore environment (eh Hong Kong, Ireland, Singapore, Cyprus etc as per the Amazon/Google model)


To minimise the chances of the IBC being taxed onshore ideally the IBC should be (and be seen to be) managed and controlled from offshore. How this can be achieved is including a Nominee Director etc as part of the Corporate structure. See this page for details of how that can work:


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What Happens if I Don’t Renew My Offshore Company?

Do you own or have you formed a tax-free Offshore Company or IBC or LLC?


Do you/the Company need to (or wish to):


1. Retain ownership of existing investments/assets; or

2. Purchase further assets in the next 12 months; or

3. Continue doing business or trading; or

4. Receive any investment returns owed to the entity; or

5. Avoid having the entity’s account closed and funds frozen; or

6. Avoid incurring any personal liability for debts incurred by the Company


then the Company’s annual operating license will need to be renewed.


If the annual operating license isn’t renewed by the due date (ie usually the anniversary of the Company’s Incorporation Date) the Registry will levy additional fees that increase with time.


Typically, if the Company’s annual operating license is not renewed within 12 months of the due date, the Company will be struck off the registrar.


Depending on where it is incorporated, the Company can be reinstated to the register (ie “brought back into Good Standing”) but usually only within 3 years of being struck off. Sometimes longer.


The main risks of not renewing your Company’s annual operating license are:

(a)  Funds can be frozen by the Company’s Bankers

(b)  You can be made personally liable for any debts incurred by the Company

(c)   You may risk an asset sale contract falling through eg if you’re selling the Company, or some asset owned by the Company, and the seller finds out close to the settlement date/time that the Company is not  in Good Standing the contract could fall over (especially if time is “of the essence” in the contract)


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How and Why To Set Up An Offshore IP Company

Intellectual property (“IP”) is a creation of the mind and includes things like inventions, literary and artistic works, designs and symbols, software code, names and images used in business.


IP is commonly protected in law by way of patents, copyright and trademarks which enable the person who came up with the idea to securely earn recognition or financial benefit from whatever it is he/she has invented or created.


An Offshore IP company is an ideal vehicle for the administration and management of licenses and intellectual properties including computer software, technical know-how, patents, copyrights and trademarks.




So how does it work from a practical perspective?


At core the Offshore IP Company (which is usually set up in a nil or low tax country) is used to divert income from Trading Companies or Businesses trading in developed or high tax countries.


The first step is to transfer ownership of the IP rights to the Offshore Company/Entity.


Once that’s done the Trading Business then enters into a legal agreement (contract) with the IP Company whereby, in return for being allowed to use the IP, the Trading Company agrees to pay the Company royalties or license fees. The income arising from these agreements can then be accumulated offshore in a nil or low tax environment.


Timing is of critical importance – It is clearly preferable to acquire the IP (for example, a patent) at the earliest possible time (e.g. at the patent pending stage) before the IP becomes highly valuable. That way the capital payment for the acquisition of the IP (e.g. patent) can be set at a lower amount i.e. before its true worth has been determined in/by the market. (These capital payments may even be deferred and or staggered by way of an instalment contract such as would enable the IP Company to use subsequent royalty receipts to fund the cost of the IP).


If a deal is struck for the Offshore IP Company to buy the IP before the IP gives rise to a product or service which is offered/advertised in the market the IP might even be transferred for nominal consideration enabling the IP inventor/creator to transfer patent, copyright or trademarks in favour of the low/nil tax company before the IP suffers significant appreciation in value.


Businesses Who Pay Royalties or License Fees for the use of IP


Once it has acquired the Property the Offshore IP Company can then issue (IP) sub-licenses or exploitation rights to appropriate third party structures.


For example, a majority of software companies license their users through companies which are established in an offshore jurisdiction, or through a firm, which is not established in a classical offshore jurisdiction, but is owned or controlled by such a firm.


Typical examples of businesses that might pay license fees to a nil/low tax Offshore Company include:
- Software companies
- Companies doing business in information technologies
- License and copyrights to books, articles, music, films, etc.
- Users of Franchise operating systems

- Trademark product (e.g. Clothes/Consumer Goods/Accessories etc. Brand) manufacturers and or retailers


In some circumstances the royalties may be subject to withholding tax at source, however, the interposing of a second company in another jurisdiction may reduce the rate of tax withheld at source (a carefully selected jurisdiction can withhold taxes on royalty payments with the commercial application of double tax treaties).


Structuring Options


Another option, whilst you are still in the process of creating a new piece of intellectual property, is to involve or engage an offshore (nil tax) company as a foreign partner or financial sponsor. Participation in development at this early stage would entitle it to register as the owner or co-owner of the property.


If you involve an offshore company later, you would have to sell or assign the title to the property to the offshore company, and these kind of transactions require at the least that a fair market price deal be apparent as if no associated parties were involved (+ the transfer may involve the incurring of some CGT on the part of the inventor/creator of the IP).


Benefits of an Offshore IP Company


There are numerous benefits that an IP holding company can deliver including:

  • By placing your IP in one entity you are able to streamline the internal processes for inter-group licensing
  • Cross-jurisdictional tax issues become simpler as you will be regularly licensing IP between the same jurisdictions
  • You can justify staffing that entity with people who have the skills to manage the same so protecting valuable assets of the company further, simplifying the licensing process
  • Assets can be valued due to the income stream that accrues for the benefit of the IP holding company
  • The value of the shares in the entity can be included into the accounts which will benefit the shareholders of the holding company
  • You can split your income streams in two enabling you to sell one chunk of your business first up (i.e. the operational business) whilst retaining the other (i.e. IP) arm of the business which would entitle you to receive passive income
  • If your business or trading company ever gets sued and the IP is owned by a 2nd (e.g. Offshore) Company the most precious asset of your business can/will not be lost.
  • You get to retain ownership of your IP in a highly private environment where no one knows what you own or how much the IP is worth. (There have been many documented cases of inventors and artists who rise suddenly to fame only to lose their fortune just as quickly via a law suit filed by a disgruntled gold digging ex-lover or confidante… The chances of that happening if your IP is owned by a privacy haven company are GREATLY reduced)
  • You can potentially dramatically reduce the tax that your operating/trading company would otherwise have to pay


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