A hybrid company is limited by both shares and guarantee and so has two classes of members: Shareholders and Guarantee Members. A Guarantee Member holds a contingent liability, undertaking to contribute to the debts of the company up to a specified amount. This contrasts with the Shareholder who holds an asset – the shares.
Hybrid companies are often used as quasi trusts, particularly by residents of civil law countries that do not recognise trusts. Typically the company will be structured so that all the control rests with the shareholders while all the benefits flow to the guarantee members. The guarantee members are therefore in a similar position to the beneficiaries of a trust and the shareholders are similar to trustees. A Guarantee Member's interest can be extinguished on death meaning no succession problems, no need to obtain probate and normally no estate duty implications.
Anti-avoidance legislation may be ineffective in taxing profits rolled up within a hybrid structure. Generally there will be no reporting requirements for Guarantee Members in such a structure so unwanted attention from onshore revenue authorities can be avoided.
There are a number of offshore jurisdictions in which it is possible to form hybrid companies, including the Isle of Man, Mauritius, Gibraltar and Guernsey. Currently we believe the most flexible is the Turks & Caicos Islands hybrid company.
A guarantee company is limited only by guarantee and therefore only has Guarantee Members – no Shareholders. It can be used for similar purposes to a hybrid company but in some situations the hybrid may have advantages because control rests with a third party. In a guarantee company the Guarantee Members hold both voting rights and control making it harder to sidestep anti-avoidance legislation in some onshore countries.
Guarantee companies can be formed in most offshore and onshore jurisdictions that follow the British legal system.
Anglo Saxon Foundations
For many years civil law residents have used Liechtenstein foundations to protect family assets. English Common Law does not specifically recognise the concept of a foundation but a guarantee company may be structured to create a more sophisticated, more flexible and less expensive replica of a Liechtenstein entity. Because it is created under English Common Law, this structure will also be more generally accepted by the major onshore jurisdictions.
An Anglo Saxon Foundation is created by the founder who may also be elected as the founder member. Assets are transferred to the guarantee company as a subscription, and the company elects members and appoints directors. Membership is not transferable and ceases upon death or resignation, at which time the directors may then elect new members.
Frequently there are two types of directors: founder directors and general directors. Founder directors would normally be the founder member and their family. The founder directors have sole power to elect new members and hold control of the financial benefits. General directors would typically be professional advisors who manage the company on a day-to-day basis. They have no control over who may be elected as members, or how those members may benefit. General directors are unable to benefit in any way other than by payment of an agreed professional fee.
Limited Liability Companies (LLCs)
This is another hybrid business entity that combines the features of a partnership with those of a corporation.
An LLC has corporate form and personality but is categorised as a partnership by the Internal Revenue Code of the USA. This means that an LLC is not taxed as a separate entity. Instead, its members are taxed according to US principles as though they had received the income of the LLC directly.
If its members are non-US persons they will only be taxed on US source income or income connected with a US business. Therefore if an LLC were created with non-US individuals or companies as the members the whole structure would generally escape taxation. To prevent individual members being taxed on profits received from the LLC in their country of residence, the structure should have two offshore companies as the members.
Because of a comparative lack of onerous regulations and bureaucracy, the state of Delaware is usually the preferred domicile for a US LLC. But many offshore jurisdictions now allow for the incorporation of similar LLC companies – Bahamas, Cayman, Isle of Man and TCI companies are particularly suitable.
These LLC companies are primarily used to structure joint ventures between US and non-US corporations or persons, producing a vehicle that has corporate form but will be characterised as a partnership by the US Inland Revenue service. This creates an offshore entity that is tax neutral for US persons but may have tax advantages for non-US persons.