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Hybrid Companies & Companies Limited by Guaranty

The Hybrid Company
Not all countries allow controlled foreign corporations (CFCs).  Therefore, in some jurisdictions it is possible to establish a hybrid company where some participants have not an asset, but rather a liability.  An example of this is the Anguilla Hybrid Company, which is a company limited by both shares and a guarantee. A Hybrid Company has two classes of members - Shareholders and Guarantee Members (Guarantors). While the term "Shareholder" is probably quite familiar and well understood, the term "Guarantee Member" or "Guarantor" is less common, although sporting clubs or societies may be structured as companies limited by guarantee (see below - the Guaranty Company).

A Guarantor is elected into membership of the company by the directors on condition that the member undertakes to contribute a fixed sum to the debts of the company up to a certain specified maximum amount - this may be established a US$500.00 or less - in the event of the company's insolvent liquidation. In contract with the shareholders of the company, the Guarantor holds a contingent liability - an obligation.  The rights and obligations of each class of membership (shareholders and guarantee members) may be laid down in the Articles of Association of the company.  Alternatively, these rights and obligations may be set out by the directors in a resolution or minutes if there is a desire to keep the terms and conditions of membership confidential. As will be readily apparent, the rights and obligations that attach to each class of membership can be drafted to suit virtually any requirement.

A hybrid is a particularly attractive vehicle to residents of civil law jurisdictions, where the traditional common law trust concept may not be recognized. For these purposes, the hybrid can be structured to function as a quasi-foundation or quasi-trust.  Civil law jurisdictions may view a transfer to a trust as no more than a transfer to an individual (with consequent gift or transfer tax implications) or as void ab initio, thus defeating the very purpose of the transfer. The hybrid company can effectively separate shareholder members from guarantors and limit the rights of shareholders and guarantors so as to comply with the laws of the member's domicile in the most tax-efficient way.  

When used as a quasi-trust, the hybrid company is typically structured with voting shares, which have no rights to dividends and no participation in the capital or income of the company in any way. The Guarantors have no voting rights but participate fully in the income and capital of the company. However, if liquidated, it is possible that all assets pass to the Guarantor.  Thus control of the Company legally rests with the Shareholders, but all benefits flow to the Guarantors. The shares are then issued to professional managers or nominees, who act rather like ‘quasi-trustees’ – having legal ownership of the Company and its assets but unable to receive financial benefit from holding the shares. All of the financial benefits flow to the Guarantors, placing them in a position rather like the beneficiaries of a typical trust. A Guarantor’s interest may be extinguished on death to eliminate succession problems, remove any probate requirements and therefore may eliminate any inheritance tax/estate duty implications.  Depending on how the Articles of Association are drafted, the guarantor may transfer his rights and duties to the Company, in part or in whole, to third parties. 

The Guaranty Company  
Companies limited by guarantee are private limited companies where the liability of the members is limited. As such, it does not have shareholders but rather simple guarantors.  The limitation of liability takes the form of a member guaranteeing to pay a nominal amount, typically US$100 or less. Unlike the hybrid company, however, the guarantors hold control and voting rights in the company (it would therefore qualify as a CFC in many legislations).  A guaranty company provides a clear legal identity and has the ability to own property in its own name.

A guaranty company is often referred to as a ‘not-for-profit’ organization, meaning that its profits are not distributed to its members but are retained to be used for the purposes of the guaranty company. As such, it is ideally suited to many charitable and community initiatives where its purpose and assets remain in the charitable or community domain. However, they can also be used for of non-charitable activities such as clubs, societies, and trade associations.

Hybrid Companies and Guaranty Companies are offered by many jurisdictions, including the British Virgin Islands, Anguilla, the Turks & Caicos, Isle of Man, and  Gibraltar. 

In Anguilla, companies limited by guarantee are regulated by the Companies Act and are established a ABC's. 

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Last modified 26-Sep-2007 17:37 -0400

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Last modified 26-Sep-2007 17:37 -0400