Many foreign jurisdictions have enacted LLC statutes. A lot of these jurisdictions are so-called tax havens, which generally means that an entity organized in that jurisdiction will not be taxed by that jurisdiction if the entity is not conducting any business in the jurisdiction. If a U. S. business or U. S. real estate is owned by an entity organized in a tax haven, the entity will not be doing any business in the tax haven and will not be taxed there.
In most offshore jurisdictions with LLC statutes, the LLC laws are similar to the U. S. state LLC laws. Thus, LLC members enjoy limited liability, and the protection of the charging order. Additionally, many offshore jurisdictions provide that the charging order is the sole remedy of the creditor, with no right to foreclose.
Pursuant to the traditional choice of law analysis, the law of the jurisdiction where an entity is organized will govern the entity, even if the business is transacted elsewhere. For example, California Corporations Code Section 17450(a) provides:
The laws of the state or foreign country under which a foreign limited liability company is organized shall govern its organization and internal affairs and the liability and authority of its managers and members.
The only time when this choice of law will not be respected is when the application of the laws of the foreign jurisdiction will violate the public policy of the state where the LLC is conducting business. Because the LLC statutes of offshore jurisdictions are very similar to the U. S. LLC statutes, it is unlikely that the offshore statutes will be ignored for public policy reasons.
Thus, as opposed to exporting the assets to a foreign jurisdiction, a foreign LLC allows to import the law. While the asset protection safeguard is not as high, for many debtors it may be the only viable option.
This means that if a California resident organized a Nevis LLC to hold Idaho real estate, a creditor attempting to collect against the California resident would have to rely on the Nevis charging order statute. The Nevis charging order statute limits the creditor to the charging order, with no right to foreclose.
It is important to remember that a foreign entity that does not want to be taxed as a corporation for U. S. tax purposes should make an affirmative election to be taxed as a partnership or a disregarded entity by filing IRS Form 8832.
Some U. S. jurisdictions (like, Nevada) similarly restrict creditors to the charging order, with no right to foreclose. What is the advantage of a foreign LLC to a domestic LLC all else being equal?
The advantages are: (i) extra costs and expenses incurred by a creditor in pursuing a debtor to a foreign jurisdiction, and (ii) the favorable asset protection laws of the foreign jurisdiction. This is especially significant in light of the Olmstead decision.
Comments