Avoid These 7 Marshall Islands Company Registration Errors

Mostly, registering a corporation in the Marshall Islands is simple, as far as the legal formation is concerned. Problems however, will generally arise when it comes to opening bank accounts, going through compliance checks, for payment processors, etc., as well as in general with doing international business.

Generally speaking, few if any problems related to an offshore company result from the jurisdiction where the company was formed. Most problems come about due to bad planning, insufficient documentation, poorly designed corporate structures, or unrealistic bankability expectations that were set up during the initial formation process.

The ability to open banking accounts, how compliant your company is, and the flexibility you have operationally, along with the overall longevity of your registered entity are all impacted by early decisions made at the time of registration. This includes international businesses, new ventures (startups), holding entities, and internationally based entrepreneurs.

This article is a review of seven common mistakes made when registering a company in the Marshall Islands, which can cause problems down the road after the incorporation process has been completed.

Key Takeaways

• It’s rare to encounter problems in offshore company registration; typically it’s only when you begin to open bank accounts or engage in actual business that troubles begin.
• Decisions made at the time of company registration will play the most crucial role in whether or not the account opening and business operations go smoothly. Mistakes made at this stage can have costly consequences, including rejection from opening bank accounts, compliance and AML issues, and more.
• Not all company formation structures are the same, and not all company formation services are alike. A company structure that is poorly set up can have consequences for years to come.
• An offshore company should have a clearly identifiable commercial purpose and operational logic beyond purely formal incorporation benefits. Without a solid business purpose, it will be difficult to pass banking due diligence.
• Correcting a poorly set-up offshore company is time-consuming, complex, and more expensive than simply setting it up right in the first place.

Why These Mistakes Matter More Than They Seem

On the surface, forming an offshore entity might feel like just one step in the process. Yet, what’s happening beneath the surface is setting the stage for everything to follow: bank accounts, payment processing, partners, and compliance.

A poorly structured company can be registered just fine, only to encounter problems down the road, with the bank account being denied, payment processors rejecting it, additional compliance checks, or a partner refusing to work with it. The actual registration is rarely the issue; you’re just finding out whether you were set up correctly or not. 

Today, offshore structures are typically assessed not only from a legal perspective, but also through banking compliance, beneficial ownership transparency, AML procedures, and commercial credibility.

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Understanding the Marshall Islands Corporate Framework

The Marshall Islands’ favorable non-resident company structure and streamlined process for incorporation make it an ideal place for corporate structures internationally. However, there is no assurance that a company incorporated in an offshore country will be able to gain access to international banking, obtain payment processing, or obtain compliance approvals. 

More and more banks are now assessing offshore companies based on their business activity, ownership structure, the reasonableness of their operations, and the risk of money laundering/terrorism financing (AML/KYC) when deciding whether to provide services to them.

Mistake #1: Treating Registration as the Final Step

A big mistake many companies make is thinking that registration is the end of the game. In reality, registration is just the first step. What you need after incorporation for your offshore company to be functional are: 

• A good structure to run the company, 
• A workable banking system, 
• Clear documentation, 
• True ownership and business operations. 

If you fail to take all this into consideration when setting up your offshore company, you are making one of the most common offshore company mistakes in the Marshall Islands. 

Mistake #2: Choosing the Wrong Company Structure

Different companies serve different purposes, so it is not reasonable to set up all the companies the same way.

Having the wrong structure of the company in relation to your business activity may cause you trouble in the future, specifically with banks and your other partners.

For example:

• A trading company may need to operate through a different structure than a holding company
• A service company could be the subject of stricter compliance requirements
• Some company structures could bring more red flags than others in certain industries

Here is where some of the biggest Marshall Islands incorporation mistakes happen, and it is not necessarily because the vehicle you are using is illegal, but rather that it is not the most suitable vehicle to operate your business.

Mistake #3: Ignoring Banking Requirements Until It’s Too Late

Simply being incorporated in a particular jurisdiction is not enough for the bank to accept your account application. You’ll also need to prove the following: 

• Your intended business activity; 
• Who fully controls and owns your company; 
• The source of your company’s funds; 
• And the level of risk in your country of incorporation. 

Without the necessary information for all of the above, obtaining a bank account for your new company can, unfortunately, be very difficult if not altogether impossible. 

You’re likely to end up with your: 

• Applications rejected; 
• Delays in the setup of the account; 
• Requests to produce information that you don’t have. 

Many offshore company structures that are legally valid may still face operational difficulties if banks or payment providers consider the ownership structure, jurisdiction, or business activity to present elevated compliance risk.

Real World Example: Banking Issues After Offshore Company Formation

A successful international business contacted Q Wealth for assistance in opening a bank account following their successful registration of an offshore company; however, they encountered repeated delays and failed to meet their banking requirements.

The correct registration was completed for the company; however, the business activity description of the company’s operations, along with its supporting documentation and ownership structure, did not align with what banks consider compliant. Q Wealth assisted the client by reorganizing the documentation submitted to the bank, clarifying the company’s operational model, and enhancing the level of transparency into the company’s ownership structure so that the client could complete onboarding with a financial institution better suited to its needs.

This case illustrates why offshore companies are rarely registered solely for the purpose of being a legitimate business entity.

Mistake #4: Overusing Nominee Services Without Understanding the Risks

Nominee directors and nominee shareholders are often used in offshore company structures, yet are often misunderstood.

When used properly, they can offer a degree of privacy; when used improperly, they can create significant headaches.

Some risks include:

• Loss of actual control of the company
• Problems with due diligence and compliance reviews
• Increased scrutiny by financial institutions
• Possible damage to one’s reputation

In some situations, bad use of nominee structures creates more problems than it solves.

This is one of those less-obvious Marshall Islands company registration errors. The problem isn’t immediately obvious, but it can cause issues in the future. 

Mistake #5: No Clear Business Purpose or Substance

The majority of the time when an offshore company forms its business; it does so without a defined or logical business purpose for that business. The end result is essentially a business that exists on paper with little to no true business activity. 

This makes it more difficult to achieve many of the following issues associated with an offshore company:

• Obtaining banking services
• More frequent compliance audits
• Questions and/or delays by other businesses you may be working with or receiving services from

Ultimately, since there is no true business substance in a business that is simply registered, it may not actually exist as a true business.

Mistake #6: Poor Documentation and Record-Keeping

Many people tend to ignore documentation in the beginning (formation) stages. At first glance, it seems like no big deal. However, when you need to provide documents for banking, audits, partnerships, etc., there could be an issue. 

Some of them might be:

• Missing agreements/resolutions;
• Incorrectly documented owner details;
• The same documents may differ with each service provider;
• Lack of business support information.

Mistake #7: Choosing the Cheapest Setup Option

Price can be a critical factor when starting an offshore company, but going the cheapest route often sets you up for disaster further down the track.

The lowest price usually involves:

• Little to no advice
• Sub-par documentation
• Minimal ongoing assistance
• One-size-fits-all solutions

In lots of cases, the “lowest cost” option is actually the most expensive when things need to be rectified.

This is probably the most common mistake in the offshore company setup process, as the cost is often more important than long-term function. 

Quick Comparison: Good Setup vs Poor Setup

This difference often determines whether a company operates smoothly or constantly runs into issues.

How to Avoid These Mistakes

To prevent those issues, you don’t need to adopt complicated tactics; just make sure to prepare ahead of time. In general, a better way is to:

• Look beyond the point of registering an offshore entity and instead, design a business that can actually be operated,
• Choose an offshore structure that reflects how you run your business,
• Consider how to open a bank account for the entity right from the start,
• Ensure that there is full and complete documentation of the setup, and
• Choose setup providers with a full grasp of both the legal and real-world side of offshore.

Ultimately, think about setting up an offshore company in a process, rather than simply doing an activity.

Are Marshall Islands Companies Still a Good Option?

Despite the drawbacks, the Marshall Islands may still be a viable solution in some cases. It’s definitely not the go-to choice for everyone, but it can serve as a viable option for some situations.

These are usually the ones who would choose it:

• For international structures of holding companies
• For certain asset management structures
• For multinational companies

But it is not a good choice for everyone. If you want access to global banking and you operate in a highly regulated industry, the Marshall Islands might not be a good choice for you.

As with most offshore jurisdictions, it’s not so much where you register the company as it is how you set things up, how you use the company, and your intentions. 

Important Considerations

In addition to obtaining a legal structure for your offshore company(ies), you need to get appropriate advice on all aspects of tax and compliance in each jurisdiction in which it operates.
Although an Offshore Structure is technically compliant with all applicable laws and regulations, (as required by international banking standards and anti-money laundering legislation), there can be operational restrictions placed upon it based upon its documentation, level of beneficial ownership, and/or lack of sufficient business activity.

Summary

While the Marshall Islands has its share of registration errors, most are not due to the jurisdiction itself but the way the company is created and how it operates going forward. Most of these mistakes are made and then reaped later, especially when companies try to set up bank accounts and undergo compliance screening, or try to conduct real business. What separates a good registration from a bad registration is, therefore, planning in advance. 

The best offshore company is one where the offshore structure has been set up with its purpose in mind and where proper documentation and reasonable bank account expectations have been set. There is no such thing as a bad offshore structure and a good one; rather, there are well-planned structures, and there are not so well-planned ones. 

Frequently Asked Questions