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Cook Islands Case Study
John is a successful businessman in his late 50s. Although he has no known creditors, he is interested in offshore asset protection because he is concerned about potential risk from a new business venture.
He is also not confident in the ability of his heirs to avoid litigation. He therefore wants to establish an asset protection trust in an offshore jurisdiction to serve as a nest egg for his own retirement, and to hold further assets for his heirs. John started a high risk investment portfolio five years ago. He directs the investment personally and has seen its cash value grow substantially. This portfolio is the asset he wants to settle on the asset protection trust. He intends to continue trading in high risk investments, and directing trading himself.
John has spoken to several offshore trust companies. Because of their potential exposure for calls as well as the risk of action by beneficiaries in the event of loss of capital, they are unwilling to act as trustee if John expects the trust to invest in high risk investments. Even if John changes to more conservative funds, they are not comfortable with him in effect being the manager. They offer to manage the funds for John on a percentage of funds under management basis (one percent), but he is not comfortable with giving control to a company outside the United States, run by people he has never done business with before, nor is he satisfied with the returns they offer.
Johnís attorney, Louis, recommends that John form his own private trustee company. Louis gives instructions to the trust company to form an offshore company with no shares.
A bearer debenture is issued to Louis as the promoter of the offshore company, and she uses her powers under the debenture to appoint John as a director. The directors of the offshore company then pass resolutions authorizing the opening of trading accounts in the name of the offshore company as trustee, and approving the appointment of the offshore company as trustee of a trust to be settled by John.
Louis then prepares an asset protection trust in the form of trust he is accustomed to using. The licensed trust company will not impose any requirements as it is not acting as trustee, although the instrument will have special asset protection provisions dealing with items such as duress, change of trustee, and appointing a standby trustee.
The offshore company signs the trust as trustee, and the trust is sent to the licensed trustee company to register.
While John is in control of the offshore company, he must be careful to maintain its separate identity as a trustee to avoid any accusation that the structure is a sham. This requires John to maintain a certain level of administration, and he may wish to bring in another person in whom he has confidence to act as a director of the offshore company to promote this independent stance. The offshore company must keep separate minutes as trustee and must ensure that it enters into contracts in this capacity only. It will need to prepare its own accounts as well as separate accounts for the trust, and should prepare a formal report to the beneficiaries annually.
Louis reviews these records with John annually. In the event that John does come under threat of litigation at a later date, he can resign (or be removed by the debenture holder) as a director, and the bearer debenture can be
by Louis to the licensed trustee company which would also appoint its own nominee as new director. Alternatively the international company could be removed and the licensed trustee company appointed as trustee.
Under Cook Islands law, the trust would have survived through the limitation of actions period and would then be protected from litigation.