The Offshore LLC

Forming the LLC in an offshore jurisdiction may provide enhanced asset protection and financial planning advantages in a variety of situations. In particular, it may be appropriate for those in high-risk businesses and medical specialties and those for whom insurance coverage is inadequate or unavailable.

Asset Protection Features

Assets in the Offshore LLC are generally protected from lawsuit and business risk because of the “charging order” limitations and the legal and practical inability to collect against the Offshore LLC in a foreign jurisdiction.

We have discussed the point that a charging order or foreclosure against a domestic LLC can be a powerful remedy for a creditor. However, a collection action against an Offshore LLC membership interest will generally not be successful. The difference in result is due to the fact that neither the Offshore LLC nor its manager can be compelled by a domestic creditor to liquidate assets or distribute funds. The typical jurisdictions where these LLCs are formed have very strict, well written legislation that protects the LLC and its membership interests from claims other than charging orders. Additionally, a U.S. judgment will not be enforceable by the offshore jurisdiction so the underlying claim would have to be retried under that court system. The myriad of obstacles to collection under these circumstances is likely to deter even a highly motivated and well-financed plaintiff.

No Tax Burdens

The Treasury Regulations treat the Offshore LLC just like a domestic LLC. If the company has a single member, it is permitted to elect to be disregarded for federal tax purposes with all income reported directly on the owner’s personal return.

As we discussed with the FLP, membership interests in an Offshore LLC can be transferred to family members at a discount for significant estate tax savings.