Most people are familiar with a company limited by shares, where the liability of its shareholders is limited to the amount paid for the shares.
Beyond this amount, the shareholders cannot be held personally liable for the debts and liabilities of the company.Less familiar is the hybrid company, where the liability of its members is limited either by shares or by guarantee. Hybrid companies offer greater flexibility in the financing and distribution of profits, and are therefore attractive for international tax planning purposes. It is interesting to note that many sporting clubs are organized using the hybrid structure.
Typically, the shares of a hybrid company will have voting rights, but no right to receive dividends or to participate in any way in the income or capital of the company.
The guarantee members of a hybrid company, on the other hand, will have no right to vote, but are entitled to participate in the distribution of income and capital. In this way, the control and management of the company rests with the shareholders, while all financial benefits flow to the guarantee member.
The interest of the guarantee members is also characterized by a pre-determined liability. A guarantee member is obligated to contribute to the debts of the company up to a certain specified maximum amount – for example, $10,000.
The guarantor member is therefore under a contractual obligation to pay a specified amount of the hybrid company’s liabilities. In contrast, once the shareholder has paid for his shares in full, he holds the shares in the company as assets.
Advantages of Hybrid Companies:
Quasi-Trust: Hybrid companies are often used as quasi-trusts, in which case the shares are issued to professional managers, who act as quasi-trustees. Unlike normal shareholders, the professional managers cannot receive financial benefit from holding the shares. Rather, all financial benefits flow to the guarantee members, who are in a position not unlike the beneficiaries of a classical trust structure.
Flexibility: The hybrid structure offers infinite flexibility as the different rights and obligations of each class of membership can be arranged to create structures tailored to the different needs of the client.
Effective tax planning tool : Hybrid companies offer the possibility for guarantee members to escape anti-avoidance tax provisions, which typically determine corporate residency based on shareholdings or management and control of the company. As the guarantee members do not own shares or have control, it may be that anti-avoidance legislation is ineffective in taxing profits rolled up within a hybrid structure.
Succession: A guarantee member's interest is extinguished upon death. As a result, there are no succession problems, no need to obtain probate, and there will normally be no inheritance tax or estate.
Duty implications: New guarantee members can be elected according to a memorandum of wishes executed by the deceased, indicating who he wishes to be elected as guarantee members upon his death.
Confidentiality: The rights and obligations of all members can be set out in the Articles of Association of the hybrid company, thereby keeping the terms and conditions of membership confidential. In addition, it is normally the case that such a structure will not bring about any reporting requirement for the guarantee members.