Discerning Hybrid Corporations and Their UsageTax Professionals' Resource
October 22, 2012 — 1,299 views
Discerning Hybrid Corporations and Their Usage
One of the latest innovations in the legal structure of business is the “low-profit limited liability corporation” or, as many know it, a hybrid company. The term “hybrid company (or corporation)” defines a business entity whose primary concern is for social benefits while at the same time maintaining a profit. In the structure of a hybrid corporation exists the regular shareholder with voting rights, and the guarantee beneficiary with no rights. It involves the setting up of documents so that the members that are shareholders get a minimal, stated return while the beneficiaries will receive any residual income distributed by the board of directors. As can be surmised, this often causes a blurring of the line between non-profit and corporations that are seeking to make a profit.
This model is one that is growing steadily due to a viewpoint of social consciousness that permits philanthropic support to beneficiaries while accessing traditional capital markets, but also the idea of a foundation or charity being run on a profitable basis allowing them to reduce their reliance on donations and keep the vision of the foundation in the forefront. The concern that many heads of charities state is that it will put the funds for charity dollars on a more competitive level. They also argue that this form of corporate structure will cause a conflict of interest that will lower the ethical bar for doing business between a trust and a beneficiary.
One form of hybrid corporation is often used in tax planning by those who live in countries that do not recognize trusts. In these countries, hybrid companies may be used to shelter funds from untoward inheritance laws or for other forms of asset protection where taxes may be of a punitive nature.
As a long-term tax free investment shelter for off shore funds, many investors find the hybrid corporation structure useful, as a beneficiary can honestly say that they have do not own assets overseas as the beneficiary funds of a hybrid corporation are distributed solely at the discretion of the directors with no guarantee, written or implied, to the beneficiary. This gives professional managers the opportunity to manage their clients’ funds in a way that brings the most bang for their buck.
Whether being used by a business to assist a group that has had to rely on charities in the past or if it is used as a tax shelter for investment and real estate transactions, the hybrid style of corporation is one that needs to be reviewed,