Limited Liability Companies
A Florida limited liability company (LLC) is a popular business planning tool. Many lawyers use the LLC as an alternative to Subchapter S corporations as the preferred legal entity for new businesses. Asset protection attorneys also use the LLC as a legal tool for domestic asset protection planning. Membership interests in a limited liability company are not exempt from execution or attachment by judgment creditors, but Florida law gives creditors limited remedies against a debtor’s LLC interest.
Florida Statutes restrict a creditor’s remedy to what is known as a “charging lien” against the LLC’s cash distributions. In the event the LLC manager chooses to make no distributions, the member’s creditor gets nothing. There is an IRS revenue ruling that held that in the event an LLC has taxable income allocated to a debtor/member, but the LLC makes no distributions which are attachable by a charging lien, the member’s creditor is responsible for his income tax liability to a member even though the creditor receives no distributions by virtue of its charging lien. A Florida creditor’s limited rights under a charging lien, together with the income tax liability, makes creditors reluctant to attack a member’s interest in a limited liability company.
Nevis Limited Liability Companies
Establishing an LLC in an offshore jurisdiction gives another layer of asset protection. The Island of Nevis, in particular, has enacted favorable LLC laws. Most important, Nevis, like Florida, permits a single-member limited liability company. Nevis law also establishes a charging lien as a creditor’s exclusive remedy to attack a debtor’s LLC ownership interest. A transfer of assets by a U.S. citizen to an offshore single-member LLC does not have any adverse tax consequences otherwise associated with the transfer of assets to other offshore entities. To attack a Nevis LLC interest, the creditor has to apply in a Nevis court for issuance of the charging lien. It is unclear whether a Nevis court would even recognize a Florida judgment giving rise to a creditor’s request for a charging order. Officials in Nevis have told me they know of no instance where a U.S. creditor has obtained a charging lien in Nevis to enforce a U.S. judgment.
Under Nevis law, the manager of the LLC does not have to be a Nevis resident or a Nevis business organization. A Nevis LLC’s manager may be the debtor/member herself or any other individual located either in the United States or a different foreign jurisdiction. A debtor serving as LLC manager has substantial control over the Nevis LLC and to physically maintain assets anywhere in the world. A Nevis LLC can own assets in the United States, Nevis, or anywhere else in the world. For example, a Nevis LLC may have a Florida bank account, or if appropriate, it may open an offshore account in Nevis or another popular banking center such as Switzerland.
A debtor serving as manager of his own Nevis LLC maintains control over LLC assets, but he does not have the best asset protection. A Nevis LLC provides optimal protection if the debtor appoints as either initial or successor manager an individual or company outside of the United States. No U.S court has jurisdiction over a foreign manager. The foreign manager will have control over all Nevis LLC assets. An effective LLC operating agreement provides that the foreign manager cannot be removed by the debtor/member. It is critical that the U.S. debtor be willing to trust a foreign LLC manager if an aggressive creditor threatens to attack the Nevis LLC. Some debtors have friends or relatives living in foreign jurisdictions whom they appoint as initial or successor managers.
U.S. debtors must exercise their own due diligence to investigate and interview offshore companies that provide LLC management services. There are many reputable companies, but each person needs to take the time to interview companies in which they may trust control over assets transferred to the Nevis LLC. You should not rely solely on referrals from your friends or your professional advisors in selecting an offshore manager for a Nevis LLC. You will find that the offshore manager will conduct more investigation and due diligence about you, the customer, than you will ever do about them. Offshore management companies are very careful about with whom they do business.
Asset management within a Nevis LLC is similar to discretionary financial accounts offered by most U.S. financial institution. A discretionary account is when you, the client, appoint a financial entity to invest your money on your behalf. If you appoint a financial company as offshore manager of your Nevis LLC, the management company and its employees do not actually manage the LLC assets. Instead, the LLC manager hires a financial institution outside the U.S. in a discretionary capacity.
Just as is the case in U.S. discretionary accounts, you set the direction and limits of financial investment within a Nevis LLC. You can instruct the money manager about degree of risk, percentage of cash invested in either stock or bonds, amount of investment in U.S. or international equities, income tax strategies, and general risk appetite. The money manager of the Nevis LLC can send monthly statements and trade confirmations if requested.
A Nevis LLC may require filing of additional tax forms with the IRS. For example, a single member Nevis LLC must file IRS Form 8832 to be a “disregarded entity” although domestic LLCs are “disregarded for tax purposes by default. Although a Nevis LLC should have no effect on U.S. income tax, people should consult their CPA regarding the filing tax reporting forms after setting up a Nevis LLC.