Comparison LLC vs. IBC (vs. others)

Note that this article compares concepts across different legal systems and jurisdictions, which invariably is prone to flaws. As always, exercise due caution and seek qualified advisement. Furthermore, I am going to glance over some business concepts that you shouldn’t come here to learn. Wikipedia and Investopedia are good places to start if terms here are unclear.

For a long time, Saint Kitts and Nevis has completely dominated non-US offshore LLC formations. However, in recent months and years, two alternatives have cropped up: Anguilla LLC and, to a lesser degree, Belize LDC.

Therefore, it’s time to discuss the differences between International Business Companies (IBCs), Limited Liability Companies (LLCs), and also take a look at a few other.

Before we start breaking down IBC, we need to understand what a private company limited by shares (Limited or LTD for short) is since IBCs are closely related to it. But before we can do even that, we (you) need to understand something very fundamental:

What Is a Company?

While similar concepts go back very far in history, companies as we view them today first appeared in English laws passed during the 1600s and 1700s as a way for investors to invest in the rapidly growing trans-Atlantic trade with limited liability and shared ownership.

Things have changed since then but limitation of liability was one of the reasons the laws became so enormously successful.

Person

Companies are persons. This wasn’t always the case.

The term legal person is often used to define a company. While it is true that all companies are legal persons, not all legal persons are companies. There are other persons, namely natural persons, examples of which would be you and I – humans.

More precisely, companies are juridical persons but the distinction between legal and natural person is rarely required which is why the terms have essentially become interchangeable.

Liability

What does this all mean? Being a legal person means that a company has many of the legal rights that natural persons have: they can enter into contracts, acquire credit (and debt), sue, and so on.

If you lend someone 1,000 EUR and they don’t pay back, you can (in theory) sue them for the money.

If you lend a company 1,000 EUR and the company doesn’t pay you back, you can sue the company but you cannot sue the directors or shareholders unless they have engaged in criminal negligence or other criminal activities – and even in those cases, it’s the directors rather than the shareholders that are most at risk.

This protects shareholders from liability. They are only liable for whatever share capital they own. Creditors cannot go after shareholders personally. (Again, presuming no severe crime has been committed.) While this might be something you take for granted, it hasn’t always been the case and I still see people engaging in business activities without forming a company, thereby becoming personally liable which in turn means creditor can go after the entrepreneur’s personal assets.

This is what the word limited stands for in phrases like private limited company or public limited company. In LLC, it’s even more obvious: Limited Liability Company.

Ownership

Companies are owned by someone. While individual companies may be owned by other companies, there is always one or more natural persons who are the ultimate beneficial owners (UBO for short) of a company. UBO is often defined as someone who owns 20% or 25% interest in a company.

How is ownership decided? In the case of typical companies, it’s shares (or stocks), which as we mentioned above is the shareholders’ liability. The more shares someone holds, the more of the company they own.

Companies have what’s called a share capital, which for an IBC is often 100,000 USD divided into 100,000 shares. Share capital in whatever currency unit you have chosen need not correspond to the number of shares on a 1:1 ratio, meaning it’s possible to have a share capital of 100,000 USD but only issue 2,500 shares, each valued 40 USD. More complex divisions are possible but I won’t go into that here.

Different legislations have different requirements on so-called paid up share capital. In Switzerland, for example, the paid-up share capital is 100% for a GmbH or 50% for an AG company. This means that all of the share capital needs to be deposited into a bank account (or guarantees provided that the funds are available) in order to form a GmbH but only 50% if forming an AG entity.

Things become a lot trickier for public companies whose shares are traded on a stock market.

IBC

IBC – International Business Company, named so after the International Business Company Acts under which they are incorporated – are for all intents and purposes private limited companies as described above.

They have directors, shareholders, share capitals, limited liability, and all the other bells and whistles of a regular company. What sets them aside from regular companies are things like:

  • Directors not on public record.
  • Shareholders not on public record.
  • One director and shareholder minimum (and in many cases the same person assumes both roles).
  • No corporate tax at all in the jurisdiction or IBCs exempt from corporate tax (ringfencing).
  • Cannot trade with locals or becomes liable for tax if trading with locals.
  • Limited-scope accounting requirements.
  • Very lax regulations on disclosures and filings.

Note that not all of these attributes apply to all IBC jurisdictions.

LLC

So what puts LLCs apart from regular private limited companies?

LLCs arguably date back to the late 1800s with inspiration by various European laws but the LLC as it is known today was first entered into law in Wyoming, USA, in 1977. There is a great degree of overlap between LLC and partnerships, which is why the concept of single-member LLC is not always available. Some US states require a more that LLCs have more than one member.

Here is a breakdown of differences and similarities between private limited companies and LLCs.
[table] ;LLC;Private Limited;IBC
Officials;Members.;Directors.;Directors.
Ownership;Member agreement.;Shareholders.;Shareholders.
Public records;Often just name of company.;Company details, details about directors, and sometimes shareholders;None.
Taxation;Pass-through (members are taxed on personal income).;Corporate tax.;None.
Record keeping;Often simple but must be kept.;Detail records to be kept.;Often simple but must be kept.
Annual filings;Varies but generally simple: company renewal, sometimes summarized financial statement.;Varies but generally requires declaration of directors, shareholders, activities, and financial statements.;None.
[/table]

Ownership

Ownership of LLC is defined as per the founding agreement, either as a defined percentage or as membership units (which are similar to shares or stocks).

The main difference here is that an LLC can change its ownership much more flexibly than a regular company without regarding to paid-up capital.

As an example, two entrepreneurs (Bob and Jane) invest 10,000 USD each in a company. However, because Bob is mostly an investor and adviser whereas Jane will be doing all the work, they decide that Jane should own 75% of the company.

LLCs with membership units can have several types of units, with some units counting more than others. For example, in an LLC with ten members, each member may be assigned 10 membership units but members who contribute more (money, time, knowledge, or other) are given 10 membership super-units that count twice as much.

And so on…

LLC ownerships is very flexible. While this can be good from an operational point of view, it makes many banks a bit anxious when dealing with an LLC. Opening a bank account for an offshore LLC can be marginally more difficult than for an IBC.

Public Records

LLCs are traditionally very secretive entities. One popular usage of this in the US is to buy real estate in for example New York and concealing identities behind LLCs.

What goes on public record varies between states in the US and between jurisdictions internationally. The likes of Saint Kitts and Nevis do not put anything on public record, whereas in the US it’s often possible to verify the existence of an LLC but not to get the details of members and – even less commonly – ownership.

Taxation

It is sometimes stated that LLCs are tax-free entities. This is technically incorrect. LLCs are or can (and virtually always do) opt to be treated as pass-through entities (also called tax neutral entities or look-through entities). This means that corporate income tax does not apply at all to LLCs (with exceptions).

Instead, members are taxed on personal income. If Bob and Jane’s LLC takes out a profit of 100,000 USD, Bob needs to add 25,000 USD and Jane 75,000 USD to their next tax return under personal income.

In the case of an offshore LLC, this would mean that profits are passed on directly to you and on your next tax return in your country of residence, the income from the LLC should be included as income.

LLC Jurisdictions

This is a non-exhaustive list of onshore and offshore LLC jurisdictions.

  • Anguilla
  • Belize (Limited Duration Company)
  • Cook Islands
  • Delaware, US
  • Dubai, UAE
  • Liberia
  • Marshall Islands
  • Nevada, US
  • Panama (SRL, similar)
  • Ras al-Khaimah, UAE
  • Saint Kitts and Nevis
  • Wyoming, US

Others

LLP

Unlike in a General Partnership (GP) or a Limited Partnership (LP), where one or more or all members have full liability, Limited Liability Partnerships (LLP) are partnerships where members’ liabilities are limited.

The UK LLP is probably the most popular LLP. Similar to an LLC, it is a tax neutral entity.

A minimum of two partners are required.

I will go into more detail in an upcoming Jurisdiction Spotlight article about the UK.

SRL

SRL is another company type which is (or can be) closely related to LLC. It’s short for Sociedad de Responsabilidad Limitada (Spanish), societate cu răspundere limitată (Romanian), or Società a Responsabilità Limitata (Italian).

SRL is distinctly different from the SàRL (Société à Responsabilité Limitée), despite similar name, which exists in most French-speaking countries and a handful other.

The Panamanian SRL is arguable the closest any SRL is to being an LLC.

More on Panama next week…

11 Comments on "Comparison LLC vs. IBC (vs. others)"

  1. Hello Mr Streber

    Could you please elaborate on your statement that LLCs’ membership units could not be seized ? Does an LLC incorporated in the US or in another jurisdiction have to report its assets (bank accounts, real estate, etc…) and to whom (in particular as regards an LLC owned and managed by a non-resident alien NOT doing any business in the LLC’s juridiction) ? THANK YOU

    • Could you please elaborate on your statement that LLCs’ membership units could not be seized ?

      This varies between jurisdictions. In the case of for example Florida LLCs, it is possible to seize LLC interest units. In the case of a Saint Kitts and Nevis or other offshore LLC, this is likely to not be the case. It’d have to go to court before you’d know for sure, though.

      Does an LLC incorporated in the US or in another jurisdiction have to report its assets (bank accounts, real estate, etc…) and to whom (in particular as regards an LLC owned and managed by a non-resident alien NOT doing any business in the LLC’s juridiction) ?

      Yes, just like any other company. You typically need to report profits and gains for tax calculations.

      • Hello

        “Yes, just like any other company. You typically need to report profits and gains for tax calculations.”

        I was not talking about profits and gains. I was talking about initial assets associated with my newly created company. For example I buy a new condo in the name of my newly created LLC. The money used could be considered my initial capital ? OR I buy some stock and shares in the name of my newly created company. Do I have to report these assets then ?
        Thank you

  2. Thanks for the very clear written article!

    You write:
    LLCs are or can (and virtually always do) opt to be treated as pass-through entities (also called tax neutral entities or look-through entities). This means that corporate income tax does not apply at all to LLCs (with exceptions).

    My question: Is this something that can be decided every tax year or once defined unchangeable?

  3. Helllo Mr Streber

    From your comparison LLC/IBC :
    LLCs are traditionally very secretive entities. One popular usage of this in the US is to buy real estate in for example New York and concealing identities behind LLCs.

    What goes on public record varies between states in the US and between jurisdictions internationally. The likes of Saint Kitts and Nevis do not put anything on public record, whereas in the US it’s often possible to verify the existence of an LLC but not to get the details of members and – even less commonly – ownership.

    I am well aware that you consider that US llc are more trouble than they are worth : could you explain why please ? In particular are US LLC worth considering for non-resident aliens who do NOT do business within the US ? I am interested in particular in new Mexico LLC : any opinion ? They do have several advantages :
    – more affordable for freelancers than other jurisdictions’ LLC
    – Members or managers not on public records
    – No annual report or franchise (for New Mexico)
    – tax-free for non-resident aliens ;
    – Assets cannot be seized ;
    ALSO do you know if banks outside the US would open accounts for such non-resident LLCs ?
    Thank you

    • I am well aware that you consider that US llc are more trouble than they are worth : could you explain why please ?

      US LLCs might be considered US persons for tax. Following FATCA, this creates a lot of compliance headache for banks. They have to spend a lot of time and effort on making sure whether your LLC is liable for US income tax. It might seem obvious to you that it isn’t but the bank is risking penalties in the billions if they fail to assess the tax status of US entities.

  4. Can a Cypriot company hold a Delaware LLC and the taxation will be passed-through to Cyprus?

    • A Cypriot holding company can own a Delaware LLC. The taxation bit depends on a lot of factors, the most common pitfall being that while advertised as tax free, US LLCs are subject to US federal tax (and state/city tax if applicable) on income derived from within the US.

      Speak to a tax adviser for more in-depth details.

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