WHAT IS AN LLC?
An LLC is a legal en arate legal personality, like a Cayman Islands exempted company. Its members have limited liability. However, the LLC does not have share capital; it permits more flexible governance arrangements and capital account mechanics in a manner similar to a limited partnership. It has the capacity to sue and be sued in its own name, to incur debts and obligations, and to acquire and dispose of assets. An LLC may be formed for any lawful business, purpose or activity, and any limits on its powers will be set out in the LLC agreement, which must be in writing and governed by Cayman Islands law. An LLC agreement executed prior to the LLC's registration will only take effect from the date of registration of the LLC.
An LLC must have at least one member, but that member need not have a Cayman Islands nexus. Generally, liability is limited to the amount a member has contractually agreed to contribute to the LLC, whether this is contained in the LLC agreement or otherwise. The formation and registration of an LLC is a simple process. Broadly speaking, it requires the filing of a registration statement and payment of the appropriate fee. An LLC may (but is not required to) use one of the following suffixes in its name: 'Limited Liability Company', 'LLC' or 'L.L.C.'.
The LLC further enhances the range of structuring options already available in the Cayman Islands. For some clients, the LLC may offer additional flexibility and be well suited for consideration in certain transactions: e.g. closed end funds that need separate legal personality; general partner vehicles; preference share deals; employee incentive plans; and joint ventures in circumstances where a complex shareholders' agreement would otherwise be required to supplement an exempted company's articles of association. It has already proved to be a popular innovation.
An LLC may allow for more simplified and flexible administration than is required for the operation of an exempted company. This includes, for example, straightforward methodologies for tracking or calculation of the value of a member's investment in the LLC, as well as more flexible corporate governance concepts. In particular, the ability to provide greater symmetry with onshore LLC vehicles in some onshore- offshore fund structures can allow for greater ease and cost efficiency of administration, and can help to better align the rights of investors.
Members of an LLC may have their economic interests represented by way of a capital account, may (but need not) make capital contributions,1 and may agree that profits and losses will be allocated among the members and among classes or groups of members as provided in the LLC agreement. Different classes of membership interests with a range of voting, economic and other rights can be created.
An LLC affords considerable flexibility to its members to agree among themselves the internal structure and management arrangements, subject to certain statutory minimums. By default, an LLC will be managed by its members acting by a majority in number. However, the LLC agreement may provide for it to be managed by one or more managing members, or by non-member managers. Management of an LLC must be undertaken in good faith, and this standard of care may be varied, but not eliminated, by the express provisions of the LLC agreement. A manager of an LLC will have the rights, powers and respon ibilities afforded to it, and be subject to the obligations specified in the LLC agreement, regardless of whether the manager is a party to the LLC agreement.
Currently, there are no direct income or corporate taxes in the Cayman Islands. However, an LLC may apply for a 50-year tax undertaking certificate from the Cayman Islands government in similar terms to an exempted company, an exempted limited partnership or an exempted trust. Such a certificate confirms that the LLC will not be subject to Cayman Islands income or corporate taxes for a period of 50 years from the date of the certificate. This provides an additional level of he members of the LLC.
An LLC is requir and, in certain circumstances, make available to the Cayman Islands authorities four statutory registers containing details of the following:
- mortgages and charges, and
- security interests granted over LLC interests.
Only the register of managers is filed with the Cayman Islands Registrar of Limited Liability Companies (the Registrar). Where the default position regarding management applies, such that management is vested in the members, the details of the members should be recorded in the register of managers. Unless otherwise provided for in the LLC agreement, each member of an LLC has the right to inspect information regarding their membership interest or, subject to certain conditions, the state of the business and financial condition of the LLC. To form and register an LLC, a registration statement must be filed with the Registrar by, or on behalf of, an initial member. The registration statement must contain the following core information:
- the name of the LLC and, if applicable, its dual foreign name, together with a translation if relevant;
- the LLC's registered oﬃce address in the Cayman Islands;
- if the LLC has not been formed for an unlimited duration, the term, if any, for which the LLC is formed; and
- a declaration that the LLC shall not undertake business with the public in the Cayman Islands, other than so far as may be necessary for the carrying on of the business of the LLC outside the Cayman Islands.
An LLC will be deemed to be registered on the date of filing of the registration statement, and the Registrar will issue a certificate of registration. This certificate is conclusive evidence that the statutory requirements in respect of formation and registration have been satisfied. Any change to the prescribed particulars in a registration statement must be updated by filing a certificate of amendment with the Registrar within 30 days of the change. The member or members of an LLC must enter into a written LLC agreement to regulate the conduct of the business or affairs of the LLC, but the LLC agreement does not need to be filed with the Registrar. Although the registration statement may effectively constitute the LLC agreement, a short-form LLC agreement is typically entered into at the same time as filing for registration. There are many standard provisions under the LLC Law that will apply to an LLC unless otherwise varied by the LLC agreement. These must be reviewed carefully to see which standard provisions should be varied to meet particular commercial requirements.
There are statutory time constraints, of either 30 or 60 days, for due notification of certain events to the Registrar, and it is therefore important to provide copies of the relevant signed documents to the registered office provider promptly to avoid the imposition of penalties. Every LLC must keep or cause to be kept proper accounts and material underlying documents. In January every year, an LLC must:
- file with the Registrar a return signed on behalf of the LLC certifying that the LLC has, during the preceding calendar year, complied with the provisions of the LLC Law; and
- pay the Registrar a prescribed annual fee. Failure to do so may lead the Registrar, upon six months' prior written notice, to deem the LLC a defunct entity and strike it off the register.
Because of the LLC's inherent flexibility, including, potentially, with respect to the structuring and issue or transfer of membership interests, some commentators have started to speculate on its use in estate or business succession planning. Given the long-standing body of jurisprudence, equitable principle, and statutory provision and protections2 supporting the establishment and administration of trust structures in the Cayman Islands, and the familiarity of trust structures to settlors, beneficiaries, regulators and tax authorities across a broad range of jurisdictions, one would generally expect trusts to continue to be the preferred structure for high-value estate and business succession planning. Further, it remains to be seen what position relevant domestic revenue authorities will take on the fiscal treatment of, for example, individual LLC members' interests and succession to such an interest on death of a member.
What is plain, however, is that, for certain complex commercial transactions, the flexibility of the new LLC vehicle is providing an interesting additional structuring option among the many available in the Cayman Islands.
1 Which may be in cash, property, other assets, services rendered, or simply an obligation to contribute assets or perform services
2 For example, the ﬁrewall provisions in the Cayman Islands Trusts Law (2011 Revision)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.