International tax practitioners have long appreciated the benefits of vehicles which allow them to pass profits from the entity level to the ownership level prior to the assessment of tax. Such vehicles are usually referred to as having fiscal or tax "transparency". Traditional forms of fiscally transparent entities are partnerships, sole proprietorships and joint ventures. In the former, a partnership conducts business in its own right but is not taxed at that level. Instead, the tax assessment is reallocated from the partnership vehicle to the partners themselves, who are each then taxed on their individual percentage of the partnership's profits at their own individual rate.
One of the major drawbacks, however, of the traditionally transparent entities has been the fact that they do not benefit from the limited liability afforded to corporate vehicles. As a result, new fiscally transparent entities have evolved which seek to combine the benefits of the corporate vehicle with tax transparent qualities. The limited liability company (LLC) is one such entity.
In a LLC its members make a "contribution" (which in Anguilla may include cash, property, services rendered or a promissory note or other obligation) to the company and have only limited ownership rights. Their benefit is derived from a final dividend on dissolution, although interim distributions may also be made.
The current form of statutory LLC originated in the State of Wyoming, USA and was based on a Latin American business vehicle known as the limitada, a corporate model which synthesized limited liability with partnership taxation status. The concept has now spread to several other States in the USA, as well as a number of offshore jurisdictions including Anguilla.
US REVENUE STATUS OF LLC'S
The United States Internal Revenue Service ("USIRS") recognizes four corporate characteristics, namely:-
- continuity of life;
- limited liability;
- centralized management; and
- free transferability of interests
Possession of three or more of these characteristics will result in the USIRS treating an entity as a corporation for tax purposes. A LLC may be designed to have two, three or all of these corporate characteristics. (see Endnote 1)
The USIRS has also ruled that in the absence of an election, a LLC will be treated as a partnership provided that there are at least two members, and at least one member has unlimited liability. If all members have limited liability, the LLC will be taxed as a corporation unless it elects to be taxed as a partnership. For USIRS purposes, a single member LLC will be treated as a sole proprietorship (but see paragraph titled "Anguillian Limited Liability Companies, Members" below).
ANGUILLIAN LIMITED LIABILITY COMPANIES
Anguillian LLCs are formed under the Limited Liability Company Ordinance 1994 as amended by the Limited Liability Company (Amendment) Ordinance 1999 (together the "Ordinance"). The Ordinance has taken the LLC concept somewhat further than the Wyoming model in several respects. For example, it includes a provision stating that its term can be perpetual or as otherwise provided for in the LLC agreement. Also, unlike legislation found in some other jurisdictions, the Ordinance clearly creates an economic interest which can be transferred separate and apart from the membership interest.
As is the case with all Anguillian companies, a LLC doing no business in Anguilla is exempt from all forms of direct taxation, whether on assets, income, dividends or distributions.
The LLC operating "agreement" is the fundamental LLC document, being the written agreement concerning the affairs of the LCC and the conduct of its business. The Ordinance gives the draftsman of a LLC agreement a substantial amount of scope in this regard. The agreement may be entered into by the members of the LLC either before, after, or at the time of the signing of articles of formation (see below) and will take effect, whenever entered into, on the formation of the LLC or such later date as may be provided in the agreement.
A. Formation
An Anguillian LLC is formed by one or more persons signing articles of formation and filing them with the Registrar. No other documentation need be filed. The articles must contain:
- the name of the LLC (which must contain the words "Limited Liability Company" or the abbreviation "LLC");
- the address of the LLC's first registered office (which registered office must be provided by a person who holds a relevant licence, see Endnote 2);
- the name and address of the LLC's first registered agent (who must be a person who holds a relevant licence, see Endnote 3);
- the specific date of dissolution (if there is one); and
- such other matters as the members may determine.
An Anguillian LLC need not specify a date for dissolution as it may be perpetual or for a limited term. In the ordinary course of events, if satisfied that the provisions of the Ordinance have been complied with, the Registrar will, on receipt of the articles of formation, register the same in a Register of Limited Liability Companies and then issue a certificate of formation. This certificate will specify the date of formation of the LLC which will be either the date of registration of the articles of formation or (if a later date is specified in the articles) that date.
B. Members
Members are defined as persons who have been admitted to membership of the LLC in accordance with the relevant law.
A LLC membership interest is deemed to be personalty, and a LLC member has no interest in specific LLC property. If the agreement so provides, a member need not make a contribution or be obliged to do so. The terms and conditions of admission to membership may be contained in a separate agreement with the LLC which document is deemed incorporated into the LLC agreement. The LLC may, if the agreement permits, issue a certificate of interest evidencing a member's interest in the LLC.
C. Nature of Permissible Business
a) A LLC may not:
i) carry on a banking or trust business within the meaning of the Offshore Banks and Trust Companies Ordinance 1991;
ii) carry on business as an insurance or a reinsurance company, insurance agent, insurance broker, or insurance manager;
iii)carry on company management business within the meaning of the Company Management Ordinance 1993;
iv) own or hold an interest, whether legal or beneficial, in real property situate in Anguilla, other than property for use as an office from which to communicate with members or where books and records of the company are prepared or maintained.
b) For the purposes of paragraph C(a)(iv) above, a LLC shall be treated as owning or holding an interest in real property situate in Anguilla if it owns or holds legally or beneficially, securities in an Anguilla company or any other body corporate;
i) that owns or holds an interest, legal or beneficial, in real property situate in Anguilla; or
ii) that owns or holds, legally or beneficially, securities in an Anguilla company or other body corporate that owns or holds an interest, legal or beneficial, in real property situate in Anguilla
c) Subject to the restrictions set out in paragraphs (a) & (b) above, a LLC may carry on any business, purpose or activity not prohibited by law. A LLC has and may exercise all the powers and privileges granted by the Ordinance, any other law, or its operating agreement. In addition, Section 6(2) of the Ordinance specifically grants the following (summarized) powers to LLCs:
i) to sue and be sued in its name;
ii) to purchase, lease, etc. real or personal property;
iii) to sell, convey, mortgage, etc. its property and assets;
iv) to lend money to and otherwise assist its members;
v) to purchase, use, mortgage, lend, etc. shares or other interests in other LLCs, domestic or foreign corporations, associations, etc.;
vi) to make contracts and guarantees and incur liabilities and borrow money, etc.;
vii) to lend money, and invest generally;
viii)to conduct its business in Anguilla or any foreign jurisdiction;
ix) to appoint managers and agents;
x) to make and alter operating agreements;
xi) to indemnify members or managers;
xii) to cease its activities and dissolve its certificate of formation; and
xiii)to become a member of a general partnership, limited partnership, joint venture or similar association, company or any other LLC,
Unless its agreement provides otherwise (for details of which see the following paragraph), a member or manager may lend money to, borrow from, and act as surety for, or transact any other business with a LLC, and has the same rights and obligations with respect to any such matter as a person who is not a member or manager.
D. Operating Agreement
The agreement governs the member's liability for required contributions. A member's estate, trustee, successor, guardian or assignee is liable for his promise of contribution, in whatever form (i.e. cash, services, etc.). Such promise may be compromised only by consent of all the members of the LLC. The agreement may specify penalties for members who default in making a contribution. These may take the form of a reduction of interest in the company, subordination thereof to the non-defaulting members, forced sale of the LLC interest, forfeiture of the loan by other members of the amount necessary to met the commitment, or other penalty. Profits and losses, as well as distributions, are allocated pursuant to the agreement. If the agreement makes no provision, allocation is on the basis of agreed value (as stated in the records of the company) of the contributions made by each member to the extent that they have been received by the LLC and not returned.
E. Managers
A manager of a LLC is defined as a person who is named or designated as a manager in a LLC agreement or similar document of formation.
In the absence of contrary provisions in the LLC agreement, management of the company vests in its members in proportion to their then current percentage share in the profits. Provision is made in the Ordinance, however, for the management, in whole or in part, of the LLC by a manager, who shall be chosen by the members in the manner provided in the agreement. Election may be annual or in some other manner. There may be more than one manager, and their duties may be divided.
Unless the agreement provides otherwise, a manager may make contributions to and share in the profits, losses and distributions of a LLC. A person who is both a manager and a member has the rights and powers, and is subject to the restrictions and liabilities, of a manager. Penalties for failure by a manager to comply with the terms and conditions of the agreement may be incorporated into the agreement, and the manager may be indemnified against claims. A manager may resign even if the agreement provides he may not resign, by giving written notice to the members and other managers. In the event that his resignation is contrary to the agreement, a manager will be liable for breach of contract.
F. Distributions
Distributions on dissolution are dealt with in the following paragraph. Non-dissolution distributions will be governed by the LLC agreement. Subject to the Ordinance, a member is entitled to interim distributions before his resignation and before the dissolution and winding-up of the company. Subject to the agreement, on resignation a member may receive the distribution to which he is entitled. In the absence of provision in the agreement, he may receive the fair value of his interest based upon his right to share in distributions. Unless the agreement states otherwise, a member has no right to demand distributions in any form other than cash.
Subject to provisions to the contrary in the agreement, an entitlement to distributions gives the member the status and remedies of a creditor, with the following limitation, viz. a LLC cannot make a distribution to a member to the extent that after giving effect to the distribution, the liabilities of the LLC (other than liabilities to members on account of their LLC interests and liabilities for which the recourse of creditors is limited to specific property of the LLC), exceed the fair value of the assets of the company.
A member who receives a distribution in contravention of the above and who knew at the time of the distribution that the distribution was in breach of this restriction is liable to the LLC for the amount of the distribution.
In addition to the above, Section 52(1) of the Ordinance sets out priorities for distribution, and these are paramount to interim distributions save to the extent set out therein. Details are set out in the following paragraph.
G. Dissolution and Winding-up
a) General
The procedure for dissolution and winding-up is again governed by the LLC agreement. A manager or, if none, members owning more than a fifty percent share of the interest in the company's profits may wind up the company's affairs (see Endnote 4). The Court may also wind up the company for cause shown by any member, or manager, and may appoint a liquidator. Upon dissolution of a LLC, those winding up the company have the power to prosecute and defend all suits, settle and close the business, dispose of property, discharge and make provision for the company's debts, and distribute any remaining assets to members without affecting the member's and/or manager's liability and without imposing liability on a liquidator.
The distribution of assets is as follows:
1. to creditors (including members or managers who are creditors) in satisfaction of company liabilities, other than liabilities for which reasonable provision for payment has been made, and liabilities for interim distributions to members;
2. (unless otherwise provided in the agreement) to members and former members in satisfaction of liabilities for interim distributions and distributions on resignation;
3. (unless otherwise provided in the agreement) to members first for return of contributions and then for their economic interest, in proportion to the members' share in distributions.
A LLC which has been dissolved must make reasonable provision for the payment of all claims, including contingent, conditional and unmatured claims and liabilities known to the company. These must be paid in full if there are sufficient assets. If they are not, the claims must be paid in order of priority, and rateably amongst the claimants. The remaining assets are then to be distributed as detailed in sub-paragraphs 1-3 above. A liquidator who complies with these requirements is not personally liable to claimants of the dissolved company by reason of his actions in winding up the company.
b) By the Court
In addition to the above, an order for the liquidation and dissolution of a LLC may be made by the Court if:
i) the LLC carries on business in breach of the restrictions detailed at paragraph C(a) above;
ii) the LLC carries on business without a member;
iii)the LLC has seriously or persistently failed to comply with the Ordinance;
iv) the LLC is unable to pay its debts;
v) the Court considers it just and equitable for the LLC to be dissolved and wound up;
vi) the Court considers it not reasonably practicable for the business to be carried out in conformity with the agreement.
In all cases, notice of the judicial dissolution, winding up or appointment of a liquidator must be given to the Registrar within 21 days of the same.
H. Economic Interests And Interests In A LLC
The Ordinance makes an important distinction between a "LLC interest" and an "economic interest". A LLC interest is defined as:
An economic interest is defined as:
- the totality of a member's interest including all rights incidental to membership as may be provided in a LLC agreement or otherwise provided by the Ordinance; and
- a member's share in the profits and losses of the LLC; and
- a member's right to receive distributions of the LLC's assets.
- a member's share of the profits and losses of a LLC; and
- a member's right to receive distributions of a LLC's assets.
In the absence of contrary provisions in the LLC agreement, the whole or part of a LLC interest is assignable with the consent of the other members. The assignment gives the assignee all the rights and liabilities of the assignor. The assignee becomes a member when his name appears in the records in compliance with the agreement. If the agreement is silent, an assignee may become a member with the approval of the members other than the assignor.
An assignee who becomes a member has, to the extent assigned, the rights and powers, and is subject to the restrictions and liabilities of a member under the terms of the agreement. Unless the agreement provides otherwise, the assignee assumes the obligations of the assignor to make contributions, but does not assume the assignor's liability to return distributions made in contravention of the Ordinance if he did not know of them at the time, and could not ascertain them from the LLC agreement. Whether or not the assignee becomes a member, the assignor is not released from his liabilities with respect to contributions and distributions, which liability is stated to be a function of membership.
As the rules of assignment are somewhat confusing, they are usually avoided by making both the rights, duties and liabilities that may be assigned, and the consequences of such assignment explicit in the LLC agreement.
I. Cessation of Membership
Cessation of membership is subject to the LLC agreement or the written consent of members. Section 23(1) of the Ordinance also provides that a person shall cease membership on:
- an assignment for the benefit of creditors;
- filing for a voluntary wind-up;
- adjudication of bankruptcy or insolvency or the entering of an order for relief;
- reorganization, arrangement, liquidation, etc.;
- the appointment of a trustee, a receiver, etc;
- death;
- incompetence;
- resignation or expulsion.
The LLC agreement will govern the resignation of members and may provide that a member may not resign or assign his interest prior to the dissolution and winding-up of the company. In the absence of anything to the contrary in the agreement, a member may resign by written notice to the LLC and to each member and manager. Resignation does not relieve the member of the obligation to make a capital contribution.
A member or manager (see below) acting pursuant to a LLC agreement is not liable to the company or other member if he relies in good faith on the provisions of the agreement. The duties of a member or manager may be expanded or restricted by the agreement.
J. Transfer Of Domicile
A foreign LLC may continue as such into Anguilla. Subject to the provisions of its agreement and the Ordinance, an Anguilla LLC may depart from Anguilla and become domiciled in a foreign jurisdiction in the manner provided under the laws of such foreign jurisdiction. A LLC may also continue as a Companies Ordinance Company or an International Business Companies Ordinance Company in accordance with the provisions of the relevant Ordinances.
K. Merger And Consolidation
Subject to its agreement, a LLC may merge or consolidate with an Anguillian or foreign LLC or other business entity on approval by the members.
L Derivative Actions
A LLC agreement may prohibit or limit derivative actions. Subject thereto, a member may bring an action in the name of the company to recover a judgment in its favour if the members or managers with the authority to do so have not. The complaint is required to set out the efforts taken by the plaintiff to have the members or managers bring the action.
M. Tax Exemption
The Ordinance (Sections 70 and 71) specifically provides for a blanket tax exemption for LLCs not doing business in Anguilla which exemption extends to any dividends or distributions, as well as to stamp duty (other than in respect of transfers of property situate in Anguilla) and to the registration of documents under the Registration and Records Act.
ENDNOTES
1. Under the new USIRS "tick the box" regulations, a properly established LLC will now automatically be deemed to be a tax transparent vehicle for US federal tax purposes, unless it specifically opts out of the category.
2. Meaning a licence under the Company Management Ordinance or the Offshore Banks and Trust Companies Ordinance.
3. Meaning a licence under the Company Management Ordinance or the Offshore Banks and Trust Companies Ordinance.
4. It is not clear from the Ordinance whether this reference is to any manager or a manager who owns more than 50% of the interest in the company's profits.
If you would like further information on the Anguilla Limited Liability Companies Ordinance or details of how Harney Westwood & Riegels can help you with your limited liability company enquiries, please contact J Alex Richardson or Fiona Bada in Anguilla.
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