The Los Angeles County Bar Blog

Advantages of Foreign LLCs

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.

Esha Momeni Released

According to the Daily Sundial, "Esha Momeni, the 28-year-old grad student that was arrested last month in Iran, has been released by the Iranian government." LAist.

President-Elect Obama Warmly Welcomed

The world welcomes the election of Barack Obama as the next president of the United States. Both allies and enemies look forward to a new president of the world's most powerful country after eight years of President Bush's leadership (though hardly for the same reasons).  Only Israel is likely to be reticent and wary.

The first message to the world is universally positive. By electing a person of color, we have sent a very strong positive message to the rest of the world. Maybe now the United States can truly begin to transcend race and its often divisive politics. We the people have truly practiced what we have long preached. Regardless of party affiliation and politics, everyone ought to feel good about Mr. Obama's accomplishment, even though South Africa beat us to it.

The second message is also one of hope. Heads of state of other nations have witnessed the meteoric rise of a talented and charismatic leader possessing a markedly different style and worldview from his predecessor. They are eager to engage and to be engaged by him. President Obama has an historic opportunity to restore the luster to America's reputation, however undeservedly it has sometimes suffered in the court of public opinion, as well as make amends for some of the truly ill-advised unilateral actions of the past few years.

At the same time, President-elect Obama gives the world pause. He lacks foreign policy experience. He lacks governance experience. For heaven's sake, as an international business attorney, I have had far more experience dealing with world governments than he has (and I should NOT be president of the United States!). Is sheer ability and intellect enough?  It almost wasn't enough for a young, supremely talented and confident President Kennedy.

The other cause for concern relates to Iran.  More specifically, will Israel forebear a preemptive strike on Iran's nuclear sites?  Only the present disarray of Israel's government may prevent a preemptive strike before Senator Obama assumes the presidency.  Why? Israel perceived John McCain as being tough on Iran and sympathetic to Israeli security interests. Israel would have been more likely to forego unilateral action had Senator McCain won election. Israel perceives Mr. Obama as naively soft, especially because of his campaign rhetoric to engage in talks without conditions. President-elect Obama must act quickly to assure Israel of his ability to deal with Iran effectively or Israel may feel compelled to act while President Bush is still in office.

On balance, the world views the election of Barack Obama more positively than it would have viewed the election of Senator McCain. I congratulate Senator Obama for his victory and wish him well.  I close by inviting you to insert a universal platitude of your choice here. We all need them in these difficult times.

Fighter Pilot Admits He Targeted UFO

Milton Torres, formerly of the U.S. Air Force, has revealed that in 1957 he piloted a fighter jet that was scrambled from a base in the U.K. to intercept a UFO and was ordered to fire his weapons on it, but before he could, the object vanished. He acknowledged the incident after U.K. government files were released in May.

Preliminary searches on Findlaw and the American Society of International Law's Web page regarding the rules of engagement for interplanetary war yielded no results. Military bloggers have also been largely silent on the tactical wisdom of shooting at a UFO.

A Worthwhile Perspective on Chinese Capitalism

Yesheng Huang's Capitalism with Chinese Characteristics: Entrepreneurship and the State offers a startling but welcome alternative analysis of China's development over the past 15 to 20 years. Huang argues that China has embraced a statist-run model that favors urban development over rural development, and offers persuasive evidence for the proposition. Even the prevailing analysis of Chinese growth acknowledges that rural China lags far behind the major cities. Indeed, you don't have to travel many miles from a major city to feel like you've been put in a time machine and transported back to either a feudal or peak-Maoist period.

I've done business with China since I was a young lawyer and the Foreign Investment Law was brand new. I have been a direct participant, albeit in a small way, in China's growth through handling many transactions and a keen observer of the many changes in China since the doors opened for foreign business in 1979. However, despite acknowledging obvious and impressive growth, I can't help but observe that there is a shallowness and hollowness to some of what China has ostensibly accomplished in the past 10 years or so.  Hundreds of gleaming skyscrapers sitting empty or near empty in major cities isn't much different than the earlier large-scale production of things nobody wanted by state-owned factories operating under state-mandated production plans.  Unless China takes significant (and fairly immediate) action to promote development of its vast rural sector and to improve conditions for its still vast population of rural poor, there is a substantial risk that China will spasm both economically and politically with potentially disasterous consequences for itself and the world.