Often overlooked due to unfamiliarity and comparative rarity, the Isle of Man Limited Liability Company (‘LLC’) is a unique entity; it can be owned and controlled by a single person, provides limited liability, is simple to administer, and is incredibly straightforward from a tax perspective.
Based on US legislation, an LLC is a hybrid of a company and a partnership. It retains the company properties of both limited liability and separate legal personality but is treated fiscally as a partnership and is therefore transparent for local taxation purposes.
Its simplicity – both in terms of organisation and taxation – is the reason why it is the most popular type of company form in the USA – and also means it is the ideal way for small businesses in the Isle of Man to organise themselves
Simple legislation – the Isle of Man Limited Liability Companies Act 1996 means that the Company can be owned and controlled by a single person, so operation in practice, is much the same as being a sole trader. There is no need for separate directors, annual general meetings or other formalities.
Limited liability – Unlike like a sole trader – who is personally responsible for the debts of his or her business, the LLC enjoys the benefit of Limited Liability. This is a huge advantage as it means that should the business run into difficulty the only assets available to creditors will be those owned by the LLC. Other personal assets of the owner – such as savings and the family home, should be protected from business related claims.
Simple accounting requirements – the accounting requirements are set out in s19 of the legislation and are very straightforward. According to s19(2) “the accounting records shall be sufficient to show and explain the Company’s transactions.” In practice, this means keeping sufficient documents to satisfy the Income tax department and is very much simpler than the complex prescriptive requirements which apply to 1931 Act companies.
Taxation – Isle of Man Government policy is clear that – for local residents – income is taxable and capital gains are not. The rule is simple and straightforward both to understand and to apply. However, ‘local’ company taxation policy is much less clear; treatment of distributions relies on concessions and practice notes rather than legislation. As LLCs are transparent for tax purposes, the tax treatment is similar to being a personal owner or and therefore straightforward and non contentious.
Who should use LLCs ?
Local business people who are currently organised as sole traders might benefit from reorganising as LLCs to obtain the advantage of limited liability; this applies equally to trades people as it does to financial and other professionals.
Existing business that are organised as 1931 Act companies should consider whether the LLC form might suit them better. Certainly accounting, administration and taxation matters are substantially more straightforward when organised as an LLC compared with a 1931 Act Company.
Any existing 1931 Act business where the wife or partner acts as the second – usually sleeping – director should consider reorganising as an LLC so as to avoid having them involved in the business. This can be very desirable for personal liability purposes.
Use of an Isle of Man LLC as a personal investment company can simplify tax and accounting requirements for local people and also avoid UK inheritance tax liability on UK situs assets. See more about this in my article ‘Is this the best way for Isle of Man residents to structure their wealth ?”
As mentioned above, the Isle of Man LLC is a unique entity; it can be owned and controlled by a single person, is simple to administer, easy to manage and straightforward with respect to tax. If you would like to learn more about LLCs, then pick up the phone or drop me a line now.