What Type of Offshore Company Should You Form?

Generally speaking there are 4 kinds of companies that you could form “Offshore” as a private individual ie:


  1. A Private Company limited by shares
  2. A Company Limited by guarantee
  3. An LLC (Limited Liability Corporation)
  4. A Hybrid Company (ie a Company Limited by guarantee but with share capital)


Some Offshore jurisdictions only offer one type of company. Some offer all.


Private Companies Limited by Shares


A private company limited by shares is a class of private limited company incorporated under the laws of England and Wales, Scotland, certain Commonwealth countries or the Republic of Ireland. It has shareholders with limited liability and its shares may not be offered to the general public, unlike those of a public limited company (plc).


“Limited by shares” means that the liability of the shareholders to creditors of the company is limited to the capital originally invested, i.e. the nominal value of the shares and any premium paid in return for the issue of the shares by the company. A shareholder’s personal assets are thus protected in the event of the company’s insolvency, but any money invested in the company may be lost.


A limited company may be “private” or “public”. A private limited company’s disclosure requirements are lighter, but its shares may not be offered to the general public (and therefore cannot be traded on a public stock exchange). This is the major difference between a private limited company and a public limited company. Most companies, particularly small companies, are private.


Private companies limited by shares are usually required to have the suffix “Limited” (often written “Ltd” or “Ltd.”) or “Incorporated” (“Inc.”).


Companies Limited by Guarantee


Unlike a company limited by shares, a guarantee company has no share capital or shareholders. Instead it has members who undertake to contribute a nominal amount towards any shortfall in the company’s assets to settle its debts in the event of its being wound up. This nominal amount, set out in the company’s articles, is usually $1 but it can be any amount that is thought fit.


In this way, members of the company are protected from any personal liability for the company’s debts. Only if the company is wound up and funding is needed to pay its debts, are members liable to the extent of their guarantee.


Most guarantee companies are incorporated for non-profit making functions so they are routinely used for charities, community projects, societies, clubs and other similar bodies.


However, guarantee memberships can be issued on whatever terms the directors decide and, depending on the provisions of the Articles of Association, a guarantee company can distribute its profits to its members.


Guarantee Companies are also a popular choice for property management companies: These are set up to hold an interest in or manage communal facilities in a property which is divided into units, each being owned separately. These companies may be set up by landlords or developers or by the unitholders themselves.


The most significant feature of a guarantee company is the facility for a guarantee membership to extinguish upon the death of a Guarantee Member. Guarantee companies can therefore form the basis of a personal holding company that allows for a smooth succession of title to the underlying assets through the guarantee membership structure.


Guarantee companies can be formed in most Offshore Financial Centres as well as onshore jurisdictions that follow the English legal system.


Limited Liability Corporations (LLCs)


A Limited Liability Company (LLC) is a particular type of private limited company hailing originally from the United States but now offered by a number of Offshore jurisdictions including Belize, Seychelles and Nevis.


It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. An LLC is treated by the US etc Tax Authorities (“IRS”) as a Partnership ie as a flow through entity. Generally speaking provided all the profit is distributed to the member/s of the LLC the Company will pay no tax in the state/country of incorporation.


A Limited Liability Company (LLC) is a hybrid business entity having certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). An LLC, although a business entity, is a type of unincorporated association and is not a corporation. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. It is often more flexible than a corporation, and it is well-suited for companies with a single owner and for joint ventures (“JVs”) where the partners want to avoid having to pay tax at the Company level but are happy to declare and pay tax at home on their share of the LLC’s nett profit as received.


In the absence of express statutory guidance, most American courts have held that LLC members are subject to the same common law alter ego piercing theories as corporate shareholders. However, it is more difficult to pierce the LLC veil because LLCs do not have many formalities to maintain. So long as the LLC and the members do not commingle funds, it would be difficult to pierce this veil.


Membership interests in LLCs and partnership interests are also afforded a significant level of protection through the charging order mechanism. The charging order limits the creditor of a debtor-partner or a debtor-member to the debtor’s share of distributions, without conferring on the creditor any voting or management rights. Limited liability company members may, in certain circumstances, also incur a personal liability in cases where distributions to members render the LLC insolvent.


Hybrid Companies


A Hybrid Company is a company limited by guarantee and having a share capital.


The Hybrid Company is a fusion of the two standard forms of Limited Company, namely a Company Limited by Guarantee and a Company having a Share Capital. The members of the former type of company undertake to contribute capital to the company (as defined in its Memorandum of Association) in the event that the company becomes insolvent or goes into liquidation. The members of the latter type of company contribute capital to become a member (i.e. to become a shareholder).


Companies Limited by Guarantee typically are used to establish mutual associations, charities, clubs and non-profit making organisations as the members own the company in common but no individual member has any personal right or interest therein.


Hybrid Companies can have two or more classes of member.


The first class will be the registered members (or shareholders) who will be the controlling members. OCI will normally provide these members as the registered members will not have any right to distributions of profits but will have voting and administrative powers. The principle power of the shareholders is to elect directors to manage the company.


The second class will be the beneficial members whose identities are not in the public domain and who are the only persons entitled to share in the profits of the company although distributions from the company can only be authorised by the directors.


Subsets of members with different rights can be created through the addition of other classes of beneficial members.


As regards which type of Offshore Company is right for you that depends on a number of things including the type of business you are in your ownership structure and appetite for risk and more. As local conditions can have an impact one should always seek legal and financial advise before committing to form such a Company.


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