Special Types of Companies
i. Guarantee Company
A guarantee company is a company that is limited only by guarantee and therefore does not usually have a share capital or shareholders, but instead has members who act as guarantors. The guarantors give an undertaking to contribute a specific – often nominal – amount in the event of the winding up of the company.
As a result, common uses of guarantee companies include clubs, membership organisations and non-governmental organisations (NGOs). 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.
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.
However, in a guarantee company it is the Guarantee Members, rather than the shareholders, who hold the voting rights and control so it may not be as easy to sidestep the anti-avoidance legislation or Exchange Control regulations put in place by certain onshore countries. In such cases a “hybrid company” (see below) may have an advantage.
Guarantee companies can be formed in most IFCs as well as onshore jurisdictions that follow the English legal system.
ii. Hybrid Companies
The term “hybrid company” is used to describe a company that is limited both by shares and by guarantee and therefore has two classes of member – Shareholders and Guarantee Members. The directors elect a Guarantee Member into membership of the company on condition that the member undertakes to contribute to the debts of the company up to a certain specified maximum amount, typically US$100 or less. As such a Guarantee Member holds a contingent liability. This contrasts with the position of the shareholder who holds an asset – the shares.
The rights and obligations which attach to each class of membership can be laid down in the Articles of Association of the company or by the directors in board meetings, thereby keeping the terms and conditions of membership confidential. The arrangements that can be made are infinite and flexible. Skillful drafting can be used to attach different rights and obligations to each class of membership and create structures that are precisely tailored to the different needs of the client.
Hybrid companies are often used as “quasi trusts”, particularly by persons resident in Civil Law countries where trusts are not recognised. Typically the company will be structured so that the shares are issued on terms that each carries one vote but no rights to dividends or to participate in the capital or income of the company. The Guarantee Memberships would be issued on terms that they carry no rights to vote but all the rights to participate in the income and capital of the company. Thus all control rests with the shareholders but all benefits flow to the Guarantee Members. The shares can be issued to professional managers but, unlike normal shareholders, they cannot receive financial benefit from holding the shares and therefore must act as quasi trustees. All financial benefits flow to the Guarantee Members who are therefore in a position not unlike the beneficiaries of a trust.
A Guarantee Member’s interest can be extinguished on death thereby avoiding any succession problems and the need to obtain probate. There will generally not be any inheritance tax or stamp duty implications.
The anti-avoidance legislation enacted by many onshore countries aims to tax the undistributed or untaxed profits of low tax paying companies as though those profits have been received by the shareholders. Although the legislation differs by country, it generally focuses on the percentage of shares held or the control of the company if that control is achieved other than through the ownership of shares. Under the arrangements outlined above, the Guarantee Members would not own shares or have control of the company so it may be that this type of anti-avoidance legislation is ineffective in taxing profits rolled up within a hybrid structure. It will generally also be the case that a hybrid structure does not entail any reporting requirement for the Guarantee Members so that, on a practical level, unwanted attention from onshore revenue authorities can be avoided.
A hybrid company may also provide a means of bypassing Exchange Controls. A Guarantee Member would normally be issued with a membership certificate, but this does not constitute a share, stock or security. Most Exchange Control regulations refer to securities and therefore the holding of a Guarantee Membership may not require Exchange Control approval.
There are a number of IFCs where it is possible to form hybrid companies. The structures offered by the Isle of Man and Gibraltar have been the subject of much recent interest, but the Turks & Caicos Islands (TCI) hybrid company is perhaps the most flexible.
iii. Anglo-Saxon Foundations
Traditionally, the Liechtenstein foundation has been the preferred vehicle for residents of Civil Law jurisdictions who wish to protect family assets and pass them on to future generations. English Common Law does not specifically recognise the concept of the foundation but a guarantee company may be structured to mirror a Liechtenstein entity. Such an entity may conveniently be described as an “Anglo-Saxon Common Law Foundation”, but in many ways this structure is more sophisticated and flexible than the more expensive Liechtenstein equivalent. Moreover, because such an entity is formed under an English Common Law system, it is also more intelligible to a wider audience and will be better accepted by the major onshore jurisdictions.
An “Anglo-Saxon Foundation” is created by the founder, who may be elected as the founding member, transferring assets to the guarantee company as a subscription. The company elects members and appoints directors. Membership is not transferable and ceases upon death or resignation, but the directors may then elect new members.
Frequently there are two classes of directors – founder directors and general directors. The founder directors can only be drawn from a designated class, which would normally be the founder member and his or her family. They are the only persons who have the power to elect new members and the members are the only persons who may benefit from the company. In this way control of the financial benefits remains with the family acting in its capacity as founder directors.
The general directors would typically be professional advisors who manage the day-to-day affairs of the company but are unable to benefit in any way other than by payment of an agreed fee for their services. They cannot have any control over who may be elected as members and how those members may benefit.
iv. Limited Liability Companies (LLCs)
The Limited Liability Company is another hybrid business entity, which combines the features of a partnership with those of a corporation. A relatively new structure, the LLC was first created by the US state of Wyoming under the Wyoming Limited Liability Act of 1977. Wyoming’s example was followed by Florida in 1982 and all US states have since enacted LLC legislation. The state of Delaware is usually considered as the preferred domicile for a US LLC because of a comparative lack of regulations and bureaucracy.
An LLC has corporate form and personality but is categorised as a partnership under the US Internal Revenue Code. As such, an LLC is not independently taxable but rather its income is taken to “flow through” to its members who are taxed according to US principles as though they had received the income directly. Non-US persons are only taxed on US-source income or income connected with the conduct of a US trade or business. If the LLC earns only income which falls outside this definition and the members of the LLC are non-US persons with no US presence, then no tax
would be payable either by the LLC or by its members.
Having non-US individuals or companies as the members can therefore create a non-taxable structure. If an LLC has individual members, those members would most probably be taxed on profits received from the LLC in their country of residence, hence the recommended structure is to have two offshore companies (we recommend TCI companies) as the members.
Following the US lead, many IFCs have passed legislation enabling the incorporation of LLC structures. These are primarily used to structure joint ventures between US and non-US corporations or persons. A non-US corporation or person may gain a considerable tax advantage by structuring their affairs offshore, whereas a US corporation may lose tax credits in the country in which they are investing which would be available if they made a direct investment. The same criteria would not generally apply to a non-US person or corporation. The offshore LLC may therefore be structured so that the income attributable to the US corporation flows through complete with tax credits still attached, whereas the income attributed to the non-US person or corporation may be rolled up offshore.
Most IFCs now allow for the incorporation of an LLC, but the Bahamas, Cayman Islands, Isle of Man and TCI companies are particularly suitable. In all cases the relevant local legislation seeks to create a vehicle that has corporate form but which will be characterised as a partnership by the US Internal Revenue Service, thereby creating an offshore entity which is tax neutral for US persons but may have tax advantages for non-US persons.
v. Private Trust Companies (PTCs)
Trusts offer many substantial advantages but often potential settlors, particularly those resident in Civil Law countries where trusts are not recognised, do not wish to lose control of their assets by transferring ownership to Trustees or do not want to rely on family members to maintain them. Private Trust Companies (PTCs) however, if properly structured, can provide all the advantages of a trust without necessitating complete loss of control over the assets. For further information on PTCs.
(see Disadvantages and Solutions)
vi. Family Investment Companies (FICs)
A Family Investment Company is another trust alternative that allows the control of assets to be retained whilst their value, or most of it, is transferred away from the direct control of a potential settlor. An FIC should avoid liability to inheritance tax and might also provide substantial income and capital gains tax advantages.
As we have seen, a standard company is limited by shares but it is also possible for a company to be limited by guarantee (Guarantee Companies) or by both shares and guarantee (Hybrid Companies). Generally a share or membership carries three rights: to vote; to receive income in the form of dividends; and to own the underlying assets or capital. It is, however, possible to create shares or memberships that carry only one or two of these three rights and thereby to create an FIC.
Although the structure of the FIC has unlimited variations, typically it might involve the head of a family transferring assets into the FIC in return for its shares which might be divided into three different classes:
- Class A shares, which carry votes but no right to capital or income;
- Class B shares, which carry rights to income but no votes and no right to capital;
- Class C shares, which carry no votes and no right to income but all rights to capital.
The family head transfers assets to the FIC and initially holds all three different classes of shares. The assets have simply been exchanged for the shares so there is no resulting loss to the estate and therefore there is no chargeable transfer.
The Class C capital shares can then be gifted to family members in proportions decided upon by the family head, thereby avoiding liability to inheritance tax. The Class B income shares can be retained by the family head. They will have an assessable value but it will be minor or insignificant when compared to the value in the Class C capital shares. The Class A voting shares have no assessable value but allow the holder to control the FIC and thereby dictate what happens to the assets owned by the FIC, the way those assets are invested, the timing of any income distributions and everything else to do with the company.
In this way, an FIC therefore allows the family head to continue to administer the assets without interference and to enjoy the income, but they will have given away the substantial value that is largely in the Class C capital shares.
With care it might also be possible to structure a FIC with the capital rights attaching to memberships rather than shares and with a Members Committee, controlled by the family head, having the right to allow new persons to become members and to expel existing members. This structure would provide great flexibility and allow the family head to make changes as circumstances change, similar to the way that they might rewrite a will.
vii. Protected Cell Companies (PCCs)
Protected Cell Companies – sometimes referred to as Segregated Portfolio Companies (SPCs) – are a form of company that segregates the assets and liabilities of different classes of shares from each other and from the general assets of the PCC. Only the assets of each protected cell are available to meet liabilities to creditors in respect of that protected cell; where there are liabilities arising from a matter attributable to a particular protected cell, the creditor may only have recourse to the assets attributable to that protected cell.
PCCs were originally most commonly used in the formation of collective investment schemes as umbrella funds and for the formation of captive insurance companies, but are increasingly also being used for other purposes – for group holding structures, Private Trust Companies (PTCs), family governance and succession planning, asset holding, private investment funds, real estate, intellectual property and royalty ownership.
As PTCs, PCCs allows family or professional advisers to extend further their participation on the PTC board through cellular companies. Assets can be segregated according to risk or ownership participation, assisting in the management and enjoyment of the required assets. PCCs can act as corporate trustee with underlying cells cradling the assets with common or differing legal and beneficial interests. This extends to Family Offices and the separation of roles and functions through cells.
For family governance and succession planning, different assets and beneficial interests can be apportioned between cells to help segregate entitlements whilst preserving the advantages of the pooled cellular framework. Different share classes can be issued to suit the type of benefit to be given. Ultimately, either the core or underlying cells can be gifted during the owner’s lifetime or on death. Ownership via a PCC can avoid the requirement for foreign probate formalities. Coupled with the use of trusts, a family’s wealth can be apportioned and succession can be managed.
As a structure a PCC can hold and manage a diverse range of assets, contracts and interests under single or multiple ownership by separating out risks and potential cross-asset liabilities. A PCC can contract for services through one cell and manage a portfolio of assets in another, together, enjoying the same administrative framework but isolating their respective interests. For an entrepreneur with diverse affairs, the cellular multi-purpose vehicle approach offers a flexible administrative hub.
For private investment funds, the ability to hold separate family investments in different cells but as part of the same corporate structure will allow investment managers greater freedom in managing their mandate, and in particular with regard to risk. The cellular approach can be used to create private collective investment vehicles for a single family with different investment requirements or for unrelated clients each investing through one or more dedicated cell.
For real estate ownership, protected cells allow easier risk, financial and estate management. The ability to group cells can enable varied property interests to be consolidated or segregated, which will assist bank funding and collateralisation or even securitisation of rental streams. Cells can be migrated or sold rather than the property itself, enhancing the possibility of tax savings.
PCCs can also offer a flexible way to exploit intellectual property portfolios. Income and royalties can be segregated, as can different contracts. Jurisdictional franchises can be undertaken from different cells and IP owners can separate out their offering between different cells – foreign earnings, trademark rights, branding and product development.
PCCs (or SPCs) first originated in Guernsey and Delaware, but a number of other jurisdictions followed, and they can now be formed in Bermuda, the British Virgin Islands, the Cayman Islands, Anguilla, Ireland, Mauritius, Jersey, the Isle of Man, Malta, and Gibraltar.