A dormant company is most frequently used to protect assets. Such assets usually relate to business activities but typically single assets such as ships, yachts, airplanes, executive jets, and sports cars can be also be held in individual companies. Trusts can be used for protection and control of family assets so that hereditary assets or property can be passed on. A foundation is an incorporated, self-owning, legal entity which, although having much in common with limited companies and trusts, possesses its own unique features for protection and control.
Companies, trusts and foundations operate in very different ways. However the protection given by all comes from ownership of assets being removed from the regular user or beneficiary. Legal title to an asset is placed with a different legal entity.
For companies, trusts and foundations it is useful to consider offshore advice.
We can also add that use of a fund can give protection to investments held and made.
Using a Dormant Company
A company is considered dormant if it has no significant accounting transactions during the accounting period.
“Dormant” literally means “sleeping” and technically all companies are dormant immediately after incorporation. Many stay in that condition and around 19% of all companies in the UK are recorded as dormant. Companies become active when there are ‘significant accounting transactions’ during the period – beginning, for example, from the first interest received or payment made for a trading transaction.
However an inactive or non-trading company can have an important purpose without ceasing to be dormant. In particular companies can be dormant to give protection for various reasons, for example to:
- Protect a name. A common use is to simply protect a name. In this way a “brand” or a name associated with an existing active company can be protected – for example in readiness for a future project.
- Allow use of a name. A protected name can be licenced for use as a trading name to a distinct operating division within another company.
- Hold shares. Shares in a company, in any country, can be held by a dormant company in the UK. Where a country encourages such inward investment, it can often offer special terms to both encourage and reassure protection for the investing UK share holder. Emerging economies do this. If they are members of the World Trade Organisation or aspire to membership of other economic or trading groups they may be required to offer such support to inward investors.
- Hold a specific asset. These can cover many items but ships, yachts, airplanes, executive jets, sports cars often feature in”single asset companies”. The asset can be used in another country and be subject to arrangements for control over its use.
- Hold intellectual property. Intellectual property covers musical, literary, and artistic works; discoveries and inventions, copy rights, trademarks, patents; and industrial design rights.
- Hold a stake in a business relationship. A dormant company can be used as the stakeholder in a joint venture or as principal to an agency.
- Own property. A company can hold the freehold of a property or the head lease as an asset but remain dormant by having the maintenance costs to dealt with by others.
A company can remain dormant for as long as is necessary – indefinitely, if for example, its purpose is to prevent the name being used by another.
In general terms the compliance requirements for both dormant and active companies are the same. For example both are required to file accounts. However it is the absence of significant accounting transactions that reduces this requirement to a nominal task for a dormant company.
While the company is dormant, various other documents and annual company balance sheets must still be prepared and filed at Companies House. The company will have to decide who will run the company and be responsible for ensuring that all the legal requirements are met.
Using a Trust for protection
Trusts may be set up for a number of reasons, but often they are used to control and protect family assets. It is very important to understand the concept behind a trust. An illustration and an explanation of the key elements can be found at Trusts.
‘Trust property’ is a phrase often used for the assets held in a trust. It can include land or buildings. Other assets, such as paintings, furniture or jewellery are sometimes referred to as ‘chattels’.
The land and buildings may produce rental income. Assets may also be sold producing gains for the trust. The way income is taxed depends on the type of income and the type of trust.
An offshore trust is simply a conventional trust that is formed under the laws of an off-shore location. Generally offshore trusts are similar in nature and effect to their onshore counterparts. Many consider that Offshore Trusts provide complete and absolute confidentiality.
Using a Foundation for protection
Generally a foundation will be considered as an alternative to trusts for clients in jurisdictions using civil law. Such clients may not be comfortable with using a common law trust structure that is unfamiliar to them.
A foundation is an incorporated, self-owning, legal entity which, like a limited company, is a separate legal personality and is therefore capable of holding assets.
Individual beneficiaries do not have an interest in the Foundation or its assets. This may be used to refute any claim by the tax authorities that the beneficiary has a taxable interest in the Foundation.
For those that seek privacy, a Foundation’s rules are confidential – though the Foundation’s founding instrument is a matter of public record. The provision of any information to the beneficiaries can be denied. In this way, the Council (and Enforcer) may go about their business for the benefit of the Foundation without interruption and undue influence from the beneficiaries.
A Foundation can be akin to a family trust in order to benefit successive generations of family members, allowing the Foundation’s founder to benefit his children and grandchildren in a controlled way, both during his life and long after his death.
Using a Fund for protection
Essentially a fund is a company with a distinct purpose – for example an “investment fund”. It would normally be an active company.
Advantages can flow from using a company titled as an investment fund because, for example, some countries give protection to “inward investors”.