A Limited Liability Company (commonly known as an LLC) is a hybrid legal entity designed to provide the operational flexibility of a partnership and the limited liability features of a corporation, thus protecting its members from personal liability. Although similar to a corporation, the LLC is treated as a non-corporation for tax purposes. This means that the taxable profits and losses of an LLC flow through to the LLC’s individual members, unlike a corporation which would be taxed as a separate business entity.

The owners of an LLC are referred to as members and are treated similar to shareholders of a corporation. A member can be a natural person, a corporation, a partnership, or another legal association or entity.

Why form an LLC?

1.       Limited Liability Protection: The most important advantage is the separation of personal assets of the members from the potential future liabilities of the LLC with regard to creditors. The corporate veil of the LLC cannot be pierced by creditors who have claims against the LLC itself. The members’ assets will remain separate unless a fraud is proven.

2.       Flexible Distributions: An LLC can elect its own form of distribution of profits, unlike a partnership, where the profits are usually divided among the partners in pro rata percentages, thus allowing more flexibility

3.       Simplified Record-keeping: While corporations are required to keep corporate secretarial records such as corporate minutes of meetings or resolutions, the LLC has no such requirement.

4.       Pass through Taxation: The hybrid nature of the LLC allows for business profits, losses and expenses to flow through the company to the individual members, thus avoiding taxation at two levels like a corporation.

5.       Enhanced Privacy of Ownership: There is no requirement to disclose ownership of the LLC, nor does it require transfer of ownership information.

6.       Exempt from Taxation in Liberia: Liberia imposes no taxes on non-resident LLCs: no income tax, no franchise tax, no inheritance tax, no capital transfer tax, no sales tax

7.       Freedom to choose location of Headquarters: The LLC’s registered address will be the LISCR Trust Company in Monrovia, Liberia, however, there is no restriction imposed on the location of the LLC’s headquarters, and there is no requirement to maintain a Liberian physical address.

8.       Corporate Stock freely transferable: Corporate stock can be transferred freely without the necessity of notifying the Registered Agent.

 Potential Drawbacks:

1.       The LLC has a limited life and will be dissolved on the death or bankruptcy of one of the members, unlike a corporation which generally has unlimited duration, however, this may be limited in the LLC Agreement.

2.       This form of entity is not used for business owners who plan a public offering.

Delaware LLCs

Wyoming became the first state to enact LLC legislation in 1977, as it wanted to attract capital investments for a Texas oil company. Other states shortly followed suit when it became clear in 1988 that the IRS would treat an LLC as a partnership for tax purposes. Delaware has become synonymous with US corporate incorporation services.

The Financial Crimes Enforcement Network (FinCEN) has issued its final rule to amend the Bank Secrecy Act (BSA) regulations regarding the reporting of foreign financial accounts. The new Regulation 31 CFR Part 1010, published on  February 24, 2011 addresses the scope of persons who are required to file reports of foreign financial accounts, specifies the types of accounts that are reportable, and adopts provisions to prevent persons who are subject to the rule from avoiding the reporting requirement.

The Rule became effective on March 28, 2011 and applies to reports required to be filed by June 30, 2011, with respect to foreign financial accounts maintained in calendar year 2010 and for reports required to be filed in subsequent calendar years.

Briefly, the rule requires that a resident or citizen of the United States who has a financial interest in or signature or other authority over a bank, securities, or other financial account in a foreign country, must report this relationship for each year in which such relationship exists. The form to be filed on or before June 30, 2011 is in respect of foreign financial accounts exceeding $10,000 USD.

The Notice of Proposed Rulemaking defines a United States person as a “citizen or resident of the United States, or an entity, including but not limited to a corporation, partnership, trust or limited liability company, created, organized, or formed under the laws of the United States, any State, the District of Columbia, the Territories, and Insular Possessions of the United States of the Indian Tribes”.

Delaware LLC law allows for the re-domiciliation of an LLC out of Delaware and the ability to convert to a foreign entity (para 18-2160 Subchapter II), providing that the LLC Agreement does not prohibit conversion. However for LLCs that exist as of the effective date of this Ruling, it is too late to avoid the “Reporting Rule” of foreign bank accounts.

However, it is not too late for those who are still contemplating the formation of an LLC. If  you intend to take advantage of an LLC for your clients without subjecting them to the U.S. Internal Revenue Service “Reporting Rule” for foreign banking activities, the Liberian non-resident LLC is the solution.