How To Choose an Offshore Corporation or Offshore LLC For Your Business
Since the level of protection in an offshore corporation or an offshore LLC are identical the law considers them equals, there is one basic reason to choose one over the other. An active business should be placed in an offshore corporation and passive investments should be placed in a Limited Liability Company (LLC).
The Offshore Corporation
A business operating overseas allows the US taxpayer to maximize the Foreign Earned Income Exclusion. Earnings can be retained over and above the FEIE amounts. This defers or eliminates any US tax payable on offshore earnings.
- The taxpayer draws a salary up to the FEIE and reports it on their personal tax return. A married couple operating a business can each draw the same salary earning about $200,000 free of US federal taxes.
- If the profits from the business are more than the FEIE then those funds are retained by the corporation and the tax is deferred until they are distributed as dividends, or possibly as salaries in the future if the profits decrease.
- The offshore corporation eliminates FICA, Medicare and other social program payments which can be up to 15% on net profit and are not covered by FEIE.
- A detailed offshore IRS Form 5471 corporate tax return must be filed annually. This requires a profit and loss statement, a balance sheet and some sub forms so there will be some cost.
The Offshore LLC
Offshore LLCs are an ideal option for passive investments. There is no tax break on passive investments in corporations within the US because passive income is taxed when it is earned. This rate is reduced only by the Foreign Tax Credit so making reporting simpler makes sense.
- The offshore LLC has a lower cost for compliance. An LLC usually files IRS Form 8858 assuming it is owned by a single person, or a couple and this is is easier and cheaper to prepare than the paperwork for the corporation.
- The Foreign Tax Credit allows the taxpayer to deduct amounts paid in taxes to other governments on foreign investments, eliminating double taxation on offshore transactions.
- There are no retained earnings in an LLC so it is not used for businesses generating income unless that income will always remain less than the FEIE.
- Total net profits are reported on Form 2555 and if they exceed the FEIE the difference will be taxable.
The difference between the LLC and the Offshore Corporation makes the choice clear in most situations. An active business is usually placed in a corporation, unless it is small enough to be served by an LLC. Passive income is placed in an LLC.
Scams exist in the offshore industry just as they do in every other aspect of the financial industry. The same principles apply in a general sense to spot the scams but there are some specifics when it comes to offshore scams.
- The scam is generally a promise to protect the investors assets for only a few hundred dollars, at least in the beginning. The initial cost is significantly lower than a good quality professional service would be. Unbelievable prices are a really good clue to any scam.
- The next part in the scam is incredible promises. The scammer promises the investor that funds will be protected, guaranteed, giving no explanation for the situations in which funds can be accessed.
- The plans offered lack customization, support and tax compliance. This is the basis for the low prices.
- Although each service has an exceptionally low price they will offer additional services that are not required, making the final tally often as much or more than would be paid for a solid professional service.
- The annual fees are astronomical.
- The tax compliance requirements are often not even mentioned.
- The investor is not educated about what needs to be done and there is no professional available to provide the services needed.
- The provider is offshore and not familiar with US laws, or is purposefully vague while answering the investor’s questions about US compliance issues.
- There are licenses required for the experts in the US who offer professional services. The scammers likely do not hold these licenses.
- The scammers will focus on secrecy. Hiding assets is not what offshore investments are for. The scammer will talk of hiding assets from courts and spouses and the IRS, when protection and tax reduction strategies are in fact what should be the goal.
IRS fines for failure to file, possible criminal charges for tax evasion, huge fees with no assistance are what investors face who look for a deal and end up being scammed.
Please, contact us with your questions in relation to Offshore Structures.
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