Tag Archives: tax planning

How a US LLC can Uniquely Benefit a UK Resident

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A prospective client approached me recently regarding the benefits of establishing a US Limited Liability Company (US LLC), becoming a non-resident of the UK, and in which order should he proceed. Due to the unique status of how the UK interprets US LLC status, residents of the UK can receive some very unique benefits if they neither incur US or UK “effectively connected income”. This was my answer:

Well I first must fully agree with you about non-res status. It can be a real deal changer. However, in your case it is not absolutely necessary, and I would feel free to proceed with a company formation prior to actually leaving the UK.

If you own a US LLC it will be treated very oddly because of the way that the US and the UK deal with how US LLCs are treated for tax purposes.

In the USA the default setting of the US LLC is “disregarded entity” which means it does not exist for US tax purposes. So if you do not live in the USA and you do not earn “effectively connect US source income” then you will owe no US taxes. In fact you will not even have to file tax returns. This will be the case even if you have a US bank account and do all your banking in the USA. Just receiving money in the USA, even if that money comes from US sources, does not create a tax liability. For that you need to do more; make things, store things, deliver things, maintain permanent offices and staff, etc. from inside the USA.

Now that all sounds pretty good! However, it only gets better for citizens of the UK. Even though the US considers the US LLC to be a “disregarded entity” the UK treats the US LLC as a separate entity. If the US LLC does no business in the UK and incurs no income in the UK then there will be no UK taxes due from the income earned by the US LLC. Now you will need to pay taxes on income you receive as a salary or profit distribution, but you will be able to provide yourself with many tax free benefits since the US LLC will have no taxes to pay anywhere. Money you do not distribute to yourself, or use for your personal benefit will be deferred taxation allowing you to further invest that money. Now it is wise to be careful about how you give yourself these “tax free benefits” since the UK may decide that what you are really doing is giving yourself income and then fraudulently evading taxes; not good. So don’t be greedy. If you are receiving real economic benefits while living in the UK then pay taxes on that income. Keep in mind that you get to choose how you get paid and can select the method with the least tax; profit distributions, salary, reimbursement for contract work, etc. You get to choose whatever is best for you, but again don’t be greedy.

This takes us to the interesting issue of how to really avoid UK taxes. Move out of the UK. I am not a UK attorney, and I do not even pretend to play one on TV, but it is my understanding that in order to gain full non-resident status you must do more than just leave the UK and stay out a certain number of days. You must also obtain a legal residency in some other country. In this regard there are a lot of interesting options out there.

I chose the Republic of Georgia for a number of reasons. For me it was mostly lifestyle issues and economic opportunities, but there are also a lot of tax benefits to be had here. Getting a residency is simple and easy, and it can lead to citizenship for some in under a year! I don’t know of any place else on earth where that is possible without some sort of ancestral claim or a huge investment in the country; at least not a country that I would actually want to be part of.

Some other interesting options that provide great tax benefits: Montenegro, Mexico, Malta, Latvia, etc. Each has its advantages and its disadvantages. Note, you do not necessarily have to live in the country that you have a residency. It might just be a legal formality so that you can claim non-res status. On the other hand it might be nice to combine the issue of tax status and where you like to live.

Why a United Kingdom Limited Partnership?

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business_2172838bFor clients who wish to protect their assets, reduce their taxes, and obtain financial privacy using a corporate entity is ideal. One of my favorits is the United Kingdom Limited Partnership (UK LP).

The UK LP is easy to establish, and once established requires zero reporting since it is a truly 100% “pass through” entity. The income from the UK LP is attributed to the partners without the need to file a partnership return in the UK. If the partners are not in the UK and the income is not derived from UK business, there will be no UK taxes and thereby no reports or tax returns that need to be filed. Now since the UK has some of the best tax treaties around, this income may also be tax exempt in your home country.

In addition, as long as you are not “doing business” in the USA (this usually means making, providing, storing and/or transporting goods or services inside the USA), there will be no tax liability in the USA either, although you may end up owing taxes on the profits of the UK LP if you are a citizen or resident of the USA and depending upon how ownership was set-up.

There are many ways of setting up a UK LP depending upon the needs of the client. Let’s chat if you have any questions!

How and Why an International Privacy Trust can Help You!

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privacyI often advise clients to use an “International Privacy Trust” to own the business entities they form in order to provide them with greater asset protection, tax planning, and financial privacy. But I also tell them, “The only thing you want to do with the International Privacy Trust is to have it passively own the shares in those companies; no bank accounts, no contracts, no financial transactions, etc.”

This seems to cause a lot of confusion, “If the International Privacy Trust is so great, why don’t we use that instead of the US LLC, UK LP, or Belize IBC?”

A good question.

Without going into complicated legal issues it is important to understand that the “Trust” was developed through a totally different legal process than was the “Company”. Trust Law is different than Corporate Law. There are different rules that apply, and things are interpreted differently.

For example: If you set up a Trust, and you name yourself to an important position in the Trust, or in some way just maintain effective control over the officers of the trust, there is a real risk that the entire trust will be set aside as a “grantor’s trust” or worse a “sham entity”. However, if you set up a company, you can be the sole shareholder, sole officer, sole employee, chief bottle-washer, etc. and have no such problems.

Again, this is because a Trust is treated differently than a Company. This does not mean the Trust is not useful; it is very useful. It simply means you must be cautious in how you use the Trust.

A Trust is very helpful in providing arms-length ownership of assets that you want removed from your estate. A Trust is very helpful at providing added privacy and confidentiality. With careful design and execution, the Trust can be a very helpful tool.

In order to avoid the charge that the Trust is a grantor’s trust, which will result in negative tax implications, (at least under “common law” jurisdictions) certain precautions need to be taken. The client cannot be the Trustee, Sole Protector, Beneficiary, etc. of a Trust. The client also needs to be at “arms-length” distance from the Trust in all transactions; that is the client cannot have effective day-to-day control of the Trust despite what the paperwork says. By limiting what the Trust actually does, this risk is lowered, and hopefully eliminated.

Another risk is the accusation that the Trust is just the “alter-ego” of the client, or a “sham entity” which will result in the entire Trust being set aside. Again, this is when the client for one reason or another is deemed to have effective day-to-day control over the actions of the Trust. Again, limiting the actions of the Trust to only passive actions such as holding shares in business entities removes this as a reasonable risk to be concerned about.

So, I advise my clients to have an International Privacy Trust that DOES NOTHING OTHER THAN own the shares of the business entity they establish. The client gets the benefit of having an effective Trust that removes the assets from his or her estate thereby providing legal and legitimate asset protection and tax benefits, but can still take an active role in the business with the business entity which is owned by the Trust. This is often referred to as a “hybrid” entity approach.

If you have any questions, please feel free to contact me.

When Going “Offshore” Should be Avoided

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Many people come to me saying that they want to go offshore to protect their assets and reduce their taxes, but are often not ideal candidates. I try to explain that I do not offshore-financial-advicehelp people go “offshore”. What I do is help people protect their assets, reduce their taxes, and obtain greater financial privacy, all in a legal and ethical manner. Offshore structures are just some of the tools that sometimes come in handy to reach these goals.

For many people, “Going Offshore” is not just the wrong tool to use to accomplish these goals, but for many it is a very dangerous and unwise tool. As I described in my prior article, “What is Jurisdiction?”, the point of going “offshore” is to take advantage of another jurisdiction that may provide more friendly laws and regulations in regards to taxes, asset protection and privacy.

However, just setting up a foreign company and then doing business inside the old jurisdiction will not work. You need to be in a situation where some or all of your business can be successfully transplanted to that new more friendly jurisdiction. Examples of “offshore” friendly businesses are: importing/exporting, software design (particularly if you are already using offshore technicians or have significant offshore clients), Internet services, financial services, entertainment industry, and other types of intellectual property. If you do not have a business that lends itself to “going offshore” then it would be wise to focus on more cost-effective domestic alternatives.

If what you are doing is entirely defined as “US Source Income” (that is you are making, providing, storing, and/or delivering a product or service inside the USA from resources located inside the USA) then there is very little reason to “go offshore”. Setting up a foreign company that is going to do business inside the USA will require the foreign company to submit itself to the laws and tax regulations of the jurisdiction. Far from reducing taxes and protecting assets, this often results in some very negative tax consequences and subjects otherwise safe assets to US liabilities. It is for this reason that most non-US companies and investors usually establish US companies to act as affiliates and/or subsidiaries of the non-US structure.

So the bad news is that “going offshore” may be unsuitable for many if not most US taxpayers.

The good news is that there are a lot of reasonably priced alternatives that can still help to protect your assets, reduce your taxes, and obtain greater financial privacy.

The easiest and simplest of these is the good old tried and true “S Corporation” which combines limited liability protection with a convenient “pass through” tax treatment. A favorite of small businesses and investors for decades, the S Corporation provides adequate asset protection by segregating the liabilities of the business from the assets of the owners. Establishing an S Corporation is simple and even a Limited Liability Company (hereinafter an LLC) can be used for those like me who think the LLC is simply the greatest thing since sliced bread. In addition the S Corporation can provide significant savings in “self-employment” taxes (the 15.3% you have to pay for Social Security and Medicare). Instead of having to pay the self-employment tax of 15.3% up to the $113,700 cap (for 2013), you can give yourself a modest salary, and take the rest of the profits as profit distributions. Although you will have to pay taxes on the profit distributions, the savings of 15% can add up very quickly and is a safe and secure way of saving taxes as long as you pay yourself a “reasonable” salary with withholding. For additional privacy you can use a Revocable Trust to own the shares and appoint a nominee officer to be named in any official papers, thus obtaining near anonymous treatment.

For most small businesses an S Corporation is all they need to protect their assets and significantly reduce their taxes. However, if the operations of the business require significant investment of capital and involve significant exposure to liabilities, additional efforts may need to be taken to insure necessary protection is in place. For such situations we have developed the “Advanced Corporate Fortress”. This combines three (3) US entities that are used together to limit the exposure of the business assets to liabilities, and to maximize the tax savings of the owners. First a C Corporation is established that will stand alone as a taxable entity. All assets of the business will be placed into this C Corporation for protection. An LLC treated as a “disregarded entity” will be established to do anything that involves any exposure to liability. Although the LLC will be owned 100% by the C Corporation, it will have little or no assets that could be seized by a potential litigant. Finally an S Corporation is established to provide management and possibly employee payroll services for the LLC. In summary the C Corporation holds the assets of the business behind its protective wall, the LLC acts as a shield to protect the C Corporation since the LLC will be exposed to any and all liabilities but has no assets, and the S Corporation helps further protect the owner’s interests and reduce the owners taxes as described above. There are also several other advanced strategies that can be used to take advantage of the fact that the C Corporation has a very low initial tax bracket, thus allowing you to place some income into the C Corporation at a reduced tax rate and then lending it out to the S Corporation which can then deduct the interest payments on the loan as deductible expenses thereby further reducing the taxes of the owners.

Now for some people, none of this is necessary. They have no business and are only concerned with protecting their assets. For these people the “Personal Preservation Fortress” is ideal. It is simple yet provides extremely powerful protection. The Personal Preservation Fortress uses two entities to provide the ultimate in asset protection. An LLC is established to hold all the assets of the individual(s). The individual(s) will receive 99% of the shares of the LLC. An Irrevocable Trust is established naming someone other than the owner(s) of the LLC as beneficiaries (this is usually children, grandchildren, pets, etc.). The Trust will receive a 1% interest in the LLC and nothing else. Here is why this system works: creditors can only take what you have. If all you have is a partial interest in an LLC, then the creditors can only take that. Now in most states creditors who seize an LLC interest of less than 100% receive only an “assignment” of that interest, not the interest itself. As such they cannot vote the shares, and they cannot demand distributions from the LLC. This is because the LLC is treated as a partnership and most states provide protection to the other partners from being forced to accept as full members involuntary additions to the partnership. Although the creditor cannot vote the shares and cannot demand a distribution of income or assets, the creditor may be liable for demands of additional capital. That is the creditor may be required to pay additional funds into the LLC in order to maintain its economic position. Finally, if the LLC produces taxable income this income does not need to be distributed to the members, but the members still must pay taxes on the income. So the creditor would have to pay taxes on income earned by the LLC which the creditor did not actually receive. Finally, the only remaining voting member of the LLC is the Trust, which is “influenced” by the owners who act as members of the Trust Committee. The Trust Committee can remove the Trustee if the Trustee fails to satisfy the Trust Committee. As you can see, this is a very unpleasant situation for a creditor to be in, and you can expect them to start negotiating on reasonable terms. The best part about this system is that it applies to all creditors including the dreaded Internal Revenue System.

Finally, there is a unique structure that combines the benefits of an Individual Retirement Account with a tax-free entity:”The IRA Rescue Plan”. This program was initially established to assist people with large amounts of IRA money earning low rates of return who wanted to invest in unconventional investments that would otherwise be prohibited or difficult with a traditional IRA. First, the funds in your current IRA must be transferred to a more cooperative Custodian (conventional Custodians like banks, brokers, etc. only make money when you trade or keep your funds in their institution). We then establish a LLC following the dictates of an important US Tax Court ruling and have the IRA Custodian buy 100% of the shares of the new LLC. The client is then appointed President of the LLC, and does whatever he or she wants to do with the money (subject to basic good faith business limitations). The IRS requires that certain rules be maintained regarding distribution of funds from the LLC to the client, but these rules essentially involve reasonable compensation to insure that the client is not “defrauding” the LLC and thus unreasonably avoiding taxes and penalties on the IRA withdrawal. The long and short of it is that the IRS does not want you to transfer the funds from your IRA to an LLC, and then raid the piggy bank and avoid paying the withdrawal fees and penalties. If care is taken, funds can be paid to the client. Now, not only do we have the IRA funds in an entity managed by the client totally free and clear of the IRA limitations as to investments, the LLC is also a tax exempt entity since all profits of the LLC “pass through” to the IRA which pays no taxes on interest, dividends and/or capital gains. Furthermore, the IRA is one of the few entities to withstand the recent changes to the Bankruptcy Code. Funds in an IRA are still safe from creditors, and the LLC, being owned by the IRA, is thus protected.

As you can see, there is an amazing number of options available for people who may find “offshore” planning too risky, or who simply do not fall into a category whereby they could benefit from “going offshore”. If anything, the choice may be too much to deal with. But that is a good thing. Having plenty of options on how to protect your assets, reduce your taxes, and obtain greater financial privacy is a consumers dream come true. If you have any questions please do not hesitate to contact us.

What is Jurisdiction?

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I thought I would discuss the important issue of “Jurisdiction”. This is because I have been hearing a lot about some countries enacting “draconian” anti-offshore rules and regulations. I thought I would explain how and why most of these stories are rather apocryphal and mostly just propaganda to scare people into submission.

Here is a fairly good definition of jurisdiction:

‘In law, jurisdiction (from the Latin ius, iuris meaning “law” and dicere meaning “to speak”) is the practical authority granted to a formally constituted legal body or to a political leader to deal with and make pronouncements on legal matters and, by implication, to administer justice within a defined area of responsibility.’ (Wikipedia)

Now if, let’s say, Australia (or the USA, or the UK, etc.) says in its propaganda literature produced by the tax authorities that new laws are being enacted to do away with “illegal offshore tax dodges”, I want to explain why people should not be too terrified. If done properly, systems can be created that will legally remove the transactions from the jurisdiction of that country making the hyperbole meaningless.

I would like to try to explain what Jurisdiction is by using an allegory.

Let us pretend that there is an odd little country named OustMuensterMark. No one really knows quite where this place is, but it is a fairly backward place. It is ruled by a rather mad Baron named Ruprecht the Red. Ruprecht recently enacted a series of tax laws which require any company doing business in OustMuensterMark to pay roughly 150% of its net profits in taxes, and require the officers to submit their eldest children hostage to the Secret Police. Although the taxes are punitive, there are so many loopholes and exceptions to the tax rules that business manages to limp along in the country, but the place is far from prosperous.

Now let us further pretend that you have a little company chartered and operating out of Florida. Your company’s name is “Wingnuts R Us, LLC” and you sell wingnuts. Every month the Museum for the Science and History of Torture and Decapitation of OustMuensterMark orders $5.35 in wingnuts to be used to tightly enclose their numerous and ever growing display cases. Are you now bound by the laws of OustMuensterMark? Should you be forking over all your money to either Ruprecht’s Tax Collection and Torture Agency or to tax attorneys in OustMuensterMark? Perhaps you should hand over your eldest child to the Secret Police? I think it is fairly clear that your sale of wingnuts to the Museum does not bring you under the jurisdiction of Ruprecht the Red. Have no fear!

One day, Ruprecht wakes up and leaps out of bed stark naked and starts running through the palace screaming, “The British are coming! The British are coming! To Arms! To Arms!!!!” The only British that are found are a few nannies on their way to work at the Royal Orphanage. After directing the thorough interrogation and torture of the unfortunate nannies to no effect, Ruprecht collapses on the floor, a victim of his own hysterical energies. His attendants put pants on him, his doctors put a straight-jacket on him, and the Thingamajig, the Legislature of OustMuensterMark, meets and finally declares Ruprecht the Red to be unfit to rule, and appoints Waldwak the Wise, an adopted child of one of Ruprecht’s distant cousins, to become the new Baron. Luckily for the unhappy state, Waldwak does not suffer from any of the mental infirmities so common in Ruprecht and his other relations. Waldwak completely abolishes the tax code and torture (putting thousands of tax attorneys and tax collectors out of work). Instead of the confusing tax code of Ruprecht, a simple 10% sales tax on goods sold inside the country is imposed and things start to change for the better. Business booms, tax receipts grow, and the Thingamajig votes to rename the country OustWaldwakMark (hereinafter OWM).

One day you get an email from an enterprising tax attorney from OWM offering to establish a Limited Liability Company for you. The email explains that your taxes will be next to nothing, and that you will be able to keep the rest of the money for your pet project of saving orphaned giraffes. You sign up and immediately notice the dramatic increase in your cash register since you are no longer paying Florida and US taxes, and you only have to pay $0.54 cents in taxes a month for the sale of wingnuts to the Museum.

At least until the State of Florida and the US IRS impound your bank accounts, factory, warehouse, cars, house, furnishings, inventory, and dental work. Although you were in complete compliance with the laws of OWM, you were under the jurisdiction of the State of Florida and the USA since your factory, warehouse, distribution center, headquarters, house, car and bank accounts were all located there. Just as the repressive and illogical laws of Ruprecht the Red had no effect upon you when you sold a few wingnuts to the Museum, neither did the enlightened actions of Waldwak the Wise protect you from the jurisdiction of the location where you are located and doing business. And simply establishing a company in OWM did not change that since the new company simply came under the same jurisdiction for the same reasons.

If only you had better understood the concept of jurisdiction! You see, the idea was not so bad, it was just the sloppy, perhaps greedy, execution of the system that was flawed. It was possible to take advantage of the benefits of an OWM Company, but you needed to structure things very differently. First of all, the Florida company should not have been terminated, but should have been kept for the purpose of managing the domestic production and sale of wingnuts. The OWM Company should have been used to manage your considerable foreign sales. The Florida Company should have sold wingnuts to the OWM Company at a reasonable profit based on wholesale prices (not retail), and then the OWM Company would have sold the wingnuts around the world out of their modest offices in OWM. If only $5.35 in wingnuts were sold in OWM, then the tax would remain at $0.54, but if $10,000,000 in wingnuts were sold elsewhere (except the USA) these sales would be tax free. Although the US tax authorities may or may not like such a transaction, as long as the initial wholesale transaction from the Florida Company to the OWM Company was legitimate and resulted in reasonable taxable gains, the additional profits earned by the OWM Company in global sales are simply outside the jurisdiction of the USA. This system is legal, ethical and completely acceptable.

Now on a more philosophical note…

How can jurisdiction be established?

  1. A nation has jurisdiction over you because you were born there and you are forever subject to its whims; or
  2. Jurisdiction is based upon an agreement between the individual and the governing entity.

In the first case, jurisdiction seems to be based upon some strange power that is imputed to a location. Rather like the saying that you can pick your friends but are stuck with your family. But this seems irrational and unreasonable. Why should an individual be subject to the jurisdiction of a particular place merely because of an accident of birth? The second choice seems more logical. You are subject to a particular jurisdiction because you “agree” by your actions and/or your presence. The agreement may be far from voluntary, but it is an agreement to submit to authority all the same. If someone holds a knife to your throat, holds your family and all your property hostage, and deprives you of the ability to go elsewhere, although it may be morally repugnant, accepting this person’s authority is all the same a choice you made even if under duress.

History suggests that most agreements regarding jurisdiction have been formed in just such coercive ways. In a way it is only logical, since authority is something that must be imposed to one degree or another. Only in recent history has the concept of jurisdictional agreement been treated as a matter of true choice which a “free” person can choose to accept or reject. In point of fact, this right to reject a jurisdiction is the basis of most of Western Political thought. But this is still mostly philosophical. The fact of the matter is that you are bound by a jurisdiction simply because you are within the grasp and power of the authorities, and it would be foolish to ever expect such authorities to willfully relinquish that which gives them power.

What can we make of this? In most modern democratic countries it is possible to take advantage of different jurisdictions in order to protect your assets, reduce your taxes, and to obtain greater financial privacy. This is because even as they complain about the loss of tax revenue, these nations still acknowledge the ancient concept of jurisdiction. However, this must be done with attention to the laws and with proper execution. If you wish to take advantage of the low tax rates of a “tax haven” you must make sure that the transactions which you are imputing to the “tax haven” do not fall within the jurisdiction of another more rapacious government authority. Simply getting a company from another country and waiving it around like a magic wand will only make you look foolish and cause you great harm when the trick does not work.

If you would like to chat about asset protection, tax planning, and financial privacy, please feel free to contact me.

What is an LLC? Why should you care?

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A limited liability company (LLC) is a hybrid business entity that blends together characteristics of a partnership and a corporate structures. It is incredibly flexible giving limited liability to its Members (the owners) just like a corporation, but offering the ease of management of a partnership.

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It also can offer interesting tax advantages depending upon how you want to use it (but only if properly set-up). It can be set up to be treated as a “disregarded entity” providing “pass through” tax treatment, or it can be set up as a “taxable association” in which case it is taxed like a corporation, but without some of the negative aspects of a corporation. This can often avoid double taxation.

But the most interesting aspect of an LLC is its ability to protect your assets. How can an LLC protect your assets?

The LLC has many special features similar to a partnership that are very beneficial for asset protection:

  • A partial LLC interest, unlike shares in a corporation, cannot be easily seized by creditors. If a Creditor attempts to take your Membership Interest, the creditor will only receive an “assignment” of the interest. The creditor can take away your membership interest, but will not be able to vote in the absence of the unanimous approval of all the other Members.
  • An LLC can require Members to make additional contributions of capital. So if a creditor takes away your Membership Interest, the LLC may require the Creditor to make additional contributions to the LLC. If the Creditor refuses, he may lose his interest in the LLC.
  • If the LLC shows a profit, it is not necessary for the profit to be distributed to the Members but can be retained by the LLC. However, the Members will be taxed on this profit even though they did not receive it. So if a Creditor takes your Membership Interest, the LLC can operate at a profit, and may be able to force the Creditor to pay taxes on profits which the Creditor never received.

A creditor who attempts to take your shares in the LLC will only get an assignment of non-voting shares. The remaining shares will be held by the other members who may be friends, family, or even specially designed trust that will protect your interests. These other Members will be able to vote on who becomes Manager of the LLC, not the creditor that took an assignment of interest.

The other members may choose to appoint you or another friendly person to be the Manager of the LLC. As Manager of the LLC you will be able to decide whether or not you and other employees get a salary, whether or not assets are sold, whether or not profits are distributed, whether or not there is a need for additional contributions from the Members, etc.

In essence, a Creditor who takes your shares in a cleverly designed LLC will not be able to vote or control the company, will not be able to force distribution of assets or profits, may have to pay taxes on income earned by the company even though it never received the profits, and will be vulnerable to demands for additional capital.

As you can see this would be a very unpleasant situation to be in if you were a creditor, but a very good situation to be in if you are trying to protect your assets. Few creditors will want your membership interest in the LLC when they realize what a hornets nest they are getting themselves into.

I have designed a specific system to be able to take advantage of these attributes of an LLC. I call it The Personal Preservation Fortress®. Check it out if you would like to get more information on how to effectively and affordably protect your assets.