20 December 2018
Offshore limited liability companies and the family office
Often described as a hybrid between a company limited by shares (LTD) and a partnership, limited liability companies (LLCs) are widely regarded as flexible, low maintenance and tax efficient. These characteristics have made LLCs popular vehicles for family offices, funds and operating businesses in the United States and elsewhere. By comparison, LTDs are generally subject to more prescriptive management duties and procedural requirements, often making them less flexible and more costly to administer.
With some inspiration from Europe, LLC legislation was first introduced in the state of Wyoming in the United States during the late 1970s. The popularity of LLCs in the United States increased considerably after Delaware introduced LLCs about a decade later and the Internal Revenue Service (IRS) approved the ‘pass through’ tax treatment of LLCs. Now the laws of all US states allow for the formation of LLCs and it is understood that as many as two-thirds of new companies formed in the United States. are LLCs.
By comparison, the ability to form LLCs under the laws of the more established ‘offshore financial centres’ has been somewhat limited. However, a number of major offshore jurisdictions have recently implemented LLC legislation, primarily with the view of attracting more business from clients based in or having connections with the United States. The Cayman Islands Limited Liability Companies Law (Cayman LLC Law) was introduced during June 2016 and was swiftly followed by Bermuda’s Limited Liability Company Act (Bermuda LLC Act) in October 2016. In the Channel Islands, the government of the islands of Jersey recently approved a draft LLC Law (Jersey Draft LLC Law) which is expected to come into force later next year. A key driver behind the introduction of offshore LLC legislation has been the desire to streamline work in respect of master/feeder hedge or private equity fund structures that wish to establish fund vehicles in both Delaware and offshore. It has also been contemplated that such offshore LLCs may be appropriate for use as special purpose vehicles in securitisation transactions and incorporated joint ventures or as group holding vehicles.
Additionally, in the family office context, LLCs may be utilised as family investment holding vehicles or to provide administrative or investment services to affiliated entities. Offshore LLCs may be used to achieve similar planning objectives as ‘family limited partnerships’ which have been emerging in popularity in a number of jurisdictions. In some quarters, offshore LLCs are also being touted as alternatives to offshore trusts – partly as a consequence of increasing and complex reporting obligations being imposed on offshore trusts, a negative perception of offshore trusts reflected in court decisions in the United States (e.g. Grant’s case) and the United Kingdom (e.g. Pugachev’s case) where the trusts purportedly created did not provide the asset protection that their creator may have envisaged.
This article primarily explores the features and mechanics of LLCs established under Bermuda’s LLC Act (Bermuda LLCs). The article also makes observations in respect of Delaware’s Limited Liability Companies Act (Delaware LLC Act), the Cayman LLC Law and the Draft Jersey LLC Law which is in place at the time of writing. Each jurisdiction’s legal histories, contexts and policy choices have led to some interesting differences between their respective LLC statutes.
As international reporting obligations and the consequent administrative burdens increase, high net-worth families in a position to do so may, like Sir Richard Branson and many others, be drawn to the idea of establishing residency and domicile offshore. Recent changes to tax laws in the United States may have contributed to high net-worth families (based in New York and California in particular) considering their residency options. Brexit and frequent changes in tax laws in respect of UK resident non-doms may be having a similar impact in the United Kingdom.
The economies of many offshore financial centres differ materially from the more diverse economies and populations of many ‘onshore jurisdictions’. Consequently, many offshore financial centres have tax regimes that are less complex than onshore jurisdictions – many do not impose income, capital gains, withholding, inheritance or a number of other taxes that are typically imposed in onshore jurisdictions.
Being solely resident and domicile in an offshore jurisdiction such as Bermuda, Cayman or Jersey may simplify a family’s tax affairs and the international reporting requirements of an offshore structure. For example, a person who is resident solely in Bermuda for tax purposes is not a ‘reportable person’ for the purposes of the Common Reporting Standard, the international reporting regime that the Organisation for Economic Cooperation and Development (OECD) arranged to have imposed on most financial institutions around the globe. Interestingly, the OECD has to date been unable to compel the US government to introduce the Common Reporting Standard. A person who is not a ‘US person’ for the purposes of the US Internal Revenue Code is not a reportable person for the purposes of FATCA, the reporting regime that the United States imposed on financial institutions around the globe in respect of US persons.
The availability of quality housing, schools, restaurants, infrastructure, transport links and a safe environment in Bermuda, Jersey and Cayman makes them attractive locations for high net-worth families considering a move offshore.
In Bermuda and other offshore jurisdictions, establishing a family office entity in the jurisdiction (which might take the form of a LLC) may facilitate the process of securing rights of the principal and family to reside there.
What is an LLC?
The LLC is a hybrid entity with separate legal personality with all the powers of a natural person, that merges characteristics of both an LTD and a partnership.
Bermuda’s LLC Act expressly provides that: “It is the intent of this Act to give the maximum effect to the principle of freedom of contract and to the enforceability of LLC agreements”. The legislation is permissive rather than prescriptive, providing a default position where the LLC agreement is silent. This principle and approach is reflected in the LLC statutes of each of the jurisdictions considered in this article. The LLC agreement is able to set out the operational and management terms applicable of the LLC allowing for great flexibility and customisation (as with partnerships) whilst enjoying separate legal personality and limited liability of its members (as with LTDs).
An entity which has separate legal personality may contract, hold property and sue and be sued in its own name. Delaware’s LLC Act provides that a Delaware LLC is a legal entity with status governed by its laws. The Delaware LLC law does not provide that a Delaware LLC is a body corporate – a concept that may have a slightly different meaning under US law than under English law. Bermuda’s LLC Act takes a similar approach to Delaware in this regard. Jersey’s Draft LLC Law expressly provides that a Jersey LLC is not a body corporate. In contrast, the Cayman LLC Law expressly provides that a Cayman LLC is a body corporate.
Discrete jurisdictional differences aside, a body corporate, such as an LTD, is a body completely separate from its partners or members and can have perpetual succession. The legal and practical differences between an entity that is a body corporate (which invariably has a separate legal personality) and an entity that has separate legal personality but which is not a body corporate may be subtle and may not have been fully explored by the courts.
The experience of Delaware and other US courts in resolving issues that arise in respect of LLCs will undoubtedly be helpful guidance to the courts in Bermuda, Cayman and Jersey. However, US law has evolved and diverged from English law in material respects in the years since the United States won its independence from Great Britain.
The Cayman LLC Law provides that the rules of equity and the common law applicable to companies registered in Cayman Islands (as modified by Cayman Islands’ statute including the Cayman Islands Companies Law) shall apply to Cayman LLCs except to the extent that they are inconsistent with the Cayman LLC Law. The decision to express in the Cayman LLC Law that the Cayman LLC is a body corporate may have been influenced by a desire to leverage from the familiar, providing a body of Cayman Islands and English case-law to guide its courts when determining issues in respect of Cayman LLCs.
Interestingly, Jersey’s Draft LLC Law provides that the rules of customary law applicable to partnerships shall apply to Jersey LLCs except in so far that they are inconsistent with the express provisions of the Jersey’s Draft LLC Law or the nature of a Jersey LLC. Jersey’s Draft LLC Law was influenced by Jersey’s existing statutes in respect of LTDs and limited liability partnerships (LLPs), the latter which are not bodies corporate under Jersey law. It may be that Jersey’s decision to have its customary partnership law, as opposed to its corporation’s laws, underlie the Draft Jersey LLC Law was influenced by a desire to increase the possibility that Jersey LLCs will be regarded as tax transparent by other jurisdictions.
In each of the jurisdictions considered, members are entitled to an interest in the LLC as provided in the LLC agreement. Analogous to the position in respect of directors and shareholders of LTDs:
- no person is personally liable for any debt or obligations of the LLC solely by reason of being a manager or member of the LLC; and
- the members will not be required to make any contribution to the LLC exceeding the amount such member has undertaken to contribute pursuant to the LLC agreement.
In contrast, subject to certain safe harbours, limited partners only benefit from limited liability provided they do not participate in the management of the limited partnership.
This article focuses on non-tax considerations for utilising offshore LLCs and, in particular, Bermuda LLCs. Clearly, the tax treatment of offshore entities in the jurisdictions in which the members are connected must also be considered as part of the planning process.
On application, Bermuda’s Minister of Finance may issue an assurance granting ‘exempted undertakings’ (such as an exempted LLC, i.e. essentially an entity not carrying on business in Bermuda that is predominantly owned by non-Bermudians) an exemption until 31 March 2035 from the imposition of any income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax introduced under Bermuda law.
Cayman has a comparable regime whereby a Cayman LLC may apply to the Cayman government for an undertaking for the Cayman LLC or its operations to be exempt from the above described taxes for up to 50 years from the date of the application’s approval.
Jersey entities that are not carrying on business in Jersey are generally subject to a 0% tax rate.
As far as onshore jurisdictions are concerned, it is generally understood that:
- offshore LLCs may be treated as tax transparent or tax opaque depending on tax laws of the applicable onshore jurisdiction; and
- the tax treatment of offshore LLCs in some jurisdictions may be influenced by the terms of the LLC agreement.
It is understood that, subject to making a ‘check the box’ or election to the IRS, profits and losses of most offshore LLCs, may, for US federal income tax purposes, be attributed to the LLC’s members as opposed to the LLC itself. In this way LLCs formed in United States and most offshore jurisdictions may be treated as tax transparent for the purposes of US federal income tax.
UK residents have experienced a perplexing journey in respect of income tax treatment of US LLCs. HMRC appears to have maintained its view that US LLCs should generally be treated as opaque for UK income tax purposes, notwithstanding the UK Supreme Court reaching conclusions to the contrary in the Swift v HMRC (aka Anson v HMRC) case. HRMC’s view is that the Supreme Court’s decision is an anomaly as a result of specific facts, in particular the existence of provisions in the applicable LLC agreement.
The Jersey Government’s LLC consultation paper has noted that the Jersey limited liability partnerships (LLPs) are regarded as transparent for the purposes of UK income tax and may consequently be preferred over Jersey LLCs by members who are resident in the United Kingdom. However, Jersey’s LLC consultation paper indicates that the state of Jersey intends to treat Jersey LLCs as transparent entities for tax purposes (i.e. like a partnership) subject that the Jersey LLC may, in a registration document to be filed with the Jersey Taxes Office, make a ‘tick the box’ election to be treated as a LTD for Jersey income tax purposes. If such an election is made the Jersey LLC will not be treated as having pass through tax treatment for the purposes of Jersey income tax. The intention, in part, may be for the jurisdictions in which members are connected to mirror Jersey’s tax treatment of the Jersey LLC. Bermuda and Cayman have not included a similar measure but those jurisdictions do not impose tax or the income or gains of companies nor require the filing of an income tax return.
Non-US persons often hold US investments through offshore LTDs in order to minimise or avoid US estate taxes. It is understood that offshore LLCs may not benefit from the same US estate tax treatment as offshore LTDs. It does not yet appear clear whether different treatment may be afforded for US estate tax purposes to Cayman LLCs as a consequence of their status as bodies corporate under the Cayman LLC Law.
In each of the jurisdictions considered, LLCs may be formed by one or more persons for any lawful business purpose or activity provided that regulated business activities require the requisite regulatory approvals. This is the case irrespective of whether the activity is carried on with a view to profit and is in contrast to the position in respect of partnerships, which are required to carry on business with a view to profit. If need be, LLCs may therefore be more readily deployed than other entities as cost centres, to hold wasting assets, provide rent-free accommodation to members or for philanthropic purposes.
LLCs that do not intend to carry on regulated business can generally be established within a matter of days provided the company formation agent has all the information it requires. The due diligence information required is analogous to that required to form an LTD and typically includes certified identification documents, evidence of residential address of the beneficial owners who are to have controlling interests in the proposed LLC and a statement from such beneficial owners and controllers of their source of wealth.
In Bermuda, formation and registration of a Bermuda LLC is relatively straightforward and, among other things, involves the following:
- approval from the Bermuda Monetary Authority (BMA) to incorporate the LLC if a fully licensed Bermuda corporate service provider has not been engaged to effect the LLC’s formation. This involves provision to the BMA of details and declarations from the persons who will, upon formation, be the managers and the persons who will be beneficial owners with a capital interest in the LLC greater than 10% of the LLC and confirmation that the proposed members have approved an LLC agreement;
- reservation of the proposed LLC’s name;
- filing of a certificate of formation (including the requisite information) with Bermuda’s Registrar of Companies (RoC); and
- payment of the applicable formation fee.
The certificate of formation must include the name of the Bermuda LLC and the LLC’s Bermuda registered office, i.e. considerably less information than is required to be included in a memorandum of association which is required to be filed in connection with the formation of a Bermuda LTD. A similar approach in respect of formation is reflected in the other jurisdictions considered.
Statutory mandated constitutional documents, which in Bermuda consist of the memorandum of association (which sets out the objects of the LTD and other prescribed information) and bye-laws (which govern a LTD’s internal organisation, management and administration), are required for LTDs but are not required or applicable in respect of LLCs in the jurisdictions considered.
The incorporation of a LTD generally involves a relatively more formal procedure in each of the jurisdictions considered. For example, in Bermuda, persons seeking to be members subscribe for shares and the provisional directors submit to the company registrar the prescribed documents requesting that the LTD be incorporated. Further, upon incorporation, a Bermuda LTD’s provisional directors are required to provide notice to shareholders in the manner provided by the Bermuda Companies Act and convene a statutory general meeting of shareholders to approve the LTD’s bye-laws and appoint the directors and auditors of the LTD.
Management and operation of LLCs
The LLC agreement
The LLC legislation in each of the jurisdictions considered provides members with the ability to create a vehicle with a customised LLC agreement which can deal with elements of the structure such as:
- voting and consent rights;
- allocations and distributions;
- creation of different classes of members, managers and interests;
- duties to the LLC or other parties;
- appointment, admission or removal of managers or members; and
- other aspects relevant to the conduct of the LLC’s business.
By comparison, in each of the jurisdictions considered, the circumstances in which a LTD’s governing documents may derogate from certain statutory provisions applicable to LTDs are generally far more prescribed.
In contrast to a partnership, each of the jurisdictions permit sole member LLCs and the LLC itself need not be a party to the LLC agreement but is deemed to be bound by it.
LLC agreements may be amended in accordance with their terms. This contrasts with the position in respect of LTDs. For example, Bermuda’s Companies Act requires amendments to the memorandum to be approved at a general meeting and subsequently filed with the RoC. Amendments to a Bermuda LTD’s bye-laws are required to be approved at a general meeting.
Additionally, legislation in respect of LTDs typically prescribes procedures for a LTD in respect of return of capital to shareholders, meetings and quorum, directors’ disclosure of interests and appointment and removal of directors.
In the jurisdictions considered, the LLC agreements (and any amendments thereof) are not required to be filed with the applicable corporate registrars.
Registers and filings
Bermuda LTDs are required to maintain certain registers, including:
- registers of directors and officers which are required to be filed with Bermuda’s Registrar of Companies; and
- registers of shareholders.
The above registers of Bermuda LTDs are available for inspection by the public. However, it is possible to appoint corporate directors and nominee shareholders.
In addition to the filing of the certificate of formation, Bermuda LLCs are required to maintain:
- and file registers of managers; and
- registers of members.
The Bermuda LLC Act provides that registers of managers of Bermuda LLCs (but not registers of members) are available for inspection by the public. Companies may be appointed as managers and doing so can thereby facilitate privacy and continuity and potentially greater liability protection from liability for the LLC’s decision-makers (see Holland’s case, UK Supreme Court).
Bermuda LLCs’ registers of members are not available for inspection by the public and it is not imperative to identify on the register that a member holds its interest in the capacity as trustee of a trust or as nominee.
At the time of writing, the Draft Jersey LLC Law was silent in respect of the maintenance and filing of registers of managers and members in respect of Jersey LLCs. It may be that these matters are to be covered in regulations that are anticipated to be issued under the Draft Jersey Laws.
Additionally, in each of Bermuda, Cayman and Jersey and many other jurisdictions, subject to certain exemptions, LLCs and certain other entities are required to maintain registers of beneficial owners and intermediate entities and to file such information with the applicable regulator. The information on such registers is not available for inspection by the public.
LLC managers and their duties
Unlike LTDs and limited partnerships, LLCs are not required to have a separation of ownership and management.
In each of the jurisdictions considered, management of an LLC is vested in its members or, if the LLC agreement provides, one or more managers chosen in the manner provided in the LLC agreement. In contrast:
- LTDs must have one or more directors and the directors are required to appoint a LTD secretary (note, however, that Jersey’s Draft LLC Laws require appointment of a secretary); and
- limited partnerships are required to have one or more general partners.
Bermuda’s LLC Act provides that, to the extent that a person owes duties (including fiduciary duties) to a Bermuda LLC (or to another member or manager or to another person that is bound by an LLC agreement) that person’s duties may be expanded or restricted or eliminated by provisions in the LLC agreement. However, no such provision shall permit fraud or dishonesty.
A comparable approach is reflected in the Delaware LLC Act and the Cayman LLC Act although, by analogy, the Bermuda requirement to abstain from fraud and dishonesty may take a form of a duty to act in ‘good faith’ under the Delaware LLC Act and the Cayman LLC Law (and the duty in good faith may have slightly different origins, meaning and application in those respective jurisdictions). Subject to the above, in Delaware, Cayman and Bermuda, a member who is managing an LLC may be permitted by the LLC agreement to act in his own best interests even though doing so may not be in the best interests of the LLC or other members. Similarly, subject to the above minimum overriding duties, a manager may be authorised by the LLC agreement to act in the best interests of the member who appointed him or her (or it) as opposed to the interests of the LLC itself or other members.
By way of an example, licensed trustees that own shares in an underlying LTD as trustees of an offshore family trust often appoint a separate person or entity as director of the LTD who would owe duties to the LTD and not to the shareholder. In contrast, if instead a Bermuda LLC were the underlying entity, subject to the LLC agreement and the overriding minimum duties, the trustee could hold the membership interest and manage the LLC taking into account its duties as trustee without owing additional fiduciary or other duties to the LLC or other members. This may reduce unauthorised conflicts of interests, facility flexibility and thereby may reduce administration costs.
In contrast, directors of a LTD owe statutory duties and common law (or customary law, in the case of Jersey) to act in the best interests of the LTD itself. Consequently, subject to analogous duties being imposed by the LLC agreement, there may be a greater likelihood that conflicts of interests and duties are likely to arise for directors of LTDs than for those managing LLCs.
But what will the position be in Jersey? The Jersey Draft Jersey LLC Law appears to take a more conservative approach, providing that managers of Jersey LLCs shall:
- act honestly and in good faith with a view to the best interests of the Jersey LLC; and
- exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
Jersey’s approach still provides a level of flexibility, although it may favour duties analogous to those of directors of LTDs, perhaps with the view to some extent of prioritising sound corporate governance over flexibility.
When is member approval required?
Subject to the LLC agreement, the Bermuda LLC Act for the most part does not prescribe decisions that require member approval for a Bermuda LLC except in respect of the following matters:
- continuances and discontinuances into or out of Bermuda;
- mergers and amalgamations;
- voluntary winding up;
- approval of a form of bye-laws, or partnership agreement, as the case may be, in respect of conversions of the LLC to a LTD or an exempted limited partnership with separate legal personality.
In contrast to the position in respect of Bermuda LLCs under the Bermuda LLC Act, the Bermuda Companies Act provides for a number of decisions to be authorised by shareholders in the general meeting. Such matters include:
- changing the name of the LTD;
- increasing or reducing share capital;
- alteration of share capital;
- continuances and discontinuances;
- schemes of arrangement;
- loans to, and granting security in favour of, directors;
- waiving the convening of annual general meetings or the presentation of accounts to shareholders and/or the appointment or removal of an auditor; and
- voluntary winding-up.
It is understood that a comparable approach is being adopted in the other jurisdictions considered in this article.
A Bermuda LLC may make distributions (of both income and capital) to the extent and at the times or upon the happening of the events specified in an LLC agreement provided the LLC’s managers have reasonable grounds for believing that, after payment of a distribution, the LLC would be able to pay its liabilities as they become due. The LLC agreement may provide for non-pro rata distributions to, for example, meet tax liabilities of different members which may be incurred at different times.
A Bermuda LTD’s directors may declare and pay a dividend or distribution of contributed surplus subject to the LTD satisfying certain solvency tests. Additionally, as is the case with LTDs in most jurisdictions, Bermuda’s Companies Act requires prescriptive statutory processes to be followed to otherwise flow funds into and out of a LTD, whether by contribution of capital, reduction of share capital, share purchase, cancellation or other form of capital distribution.
Structuring and restructuring
Bermuda law permits the following:
- continuance of foreign LTDs, foreign LLCs and foreign limited partnerships into Bermuda;
- discontinuance of Bermuda LTDs, Bermuda LLCs and Bermuda limited partnerships into a foreign jurisdiction;
- conversion of Bermuda LTDs to Bermuda LLCs or to Bermuda limited partnerships with separate legal personality and vice-versa; and
- amalgamation and merger of Bermuda LTDs and LLCs with one another or with foreign LTDs or LLCs as the case may be.
The Cayman LLC Law is substantially consistent with the Bermuda LLC law in respect of the above matters.
There have already been instances in Bermuda where families, particularly with US connections, have converted Bermuda LTDs to Bermuda LLCs. The Draft Jersey Law contemplates that regulations will be issued to provide for the continuation of non-Jersey LLCs into Jersey and discontinuation of Jersey LLCs from Jersey into other jurisdictions, mergers and demergers of Jersey LLCs – including for mergers of LLCs with bodies that are incorporated in Jersey. However, the Draft Jersey LLC Law or consultation paper issued by the Jersey government does not presently appear to contemplate conversions.
In addition to the above matters, and the ability to create different classes of managers, members and interests, the Delaware LLC Act and the Draft Jersey Law provide that LLCs may create a series, each having a separate legal personality from the LLC and each other series that may be formed. Each series may have its own managers, members and investment policies. The assets and liabilities of each series are legally insulated from those of the LLC and other series – creditors of the series only being able to recover claims from the assets of the series which incurred the liability unless otherwise agreed. The Draft Jersey LLC Law requires each series to be registered, although it is contemplated that this process will be relatively straightforward. Additionally, following the responses to the Jersey LLC consultation paper, the dissolution of the LLC will not of itself require the dissolution of the series, which can continue to exist as a separate legal entity. As well as the benefits in an investment funds context, the ability to create a series may facilitate different family groups to separate assets and liabilities, without having to from a separate LLC. In this way a ‘series LLC’ may be analogous to a protected cell company or segregated account company.
In Bermuda and Cayman, while such so-called ‘series LLCs’ are not presently available, separate classes and internal segregation of assets and liabilities can nevertheless be provided for in the applicable LLC agreement. However, such arrangements do not presently bind the creditors who are not bound by the LLC agreement and particular care would need to be taken to keep assets of such classes separate and to reflect such separation in the LLC’s accounts.
Recent amendments to the Delaware LLC Act also provide for the division of a Delaware LLC into two or more newly formed Delaware LLCs, with the dividing LLC either continuing or terminating its existence as the case may be. This feature may facilitate a sale or restructure of a business line or other restructure without the need to transfer assets and liabilities to another entity.
Under Bermuda’s LLC Act, an LLC will be wound up by the court voluntarily upon members’ resolution or at the time specified by or in accordance with the LLC agreement. In Bermuda the regime in Bermuda’s LLC Act for winding up and dissolving LLCs largely parallels the well-understood regime for winding up of Bermuda LTDs under Bermuda’s Companies Act.
Similarly, the Cayman LLC Law provides that Part V of the Cayman Companies Law and the Companies Winding Up Rules as applicable to Cayman companies existing under the Cayman Companies Law also apply with respect to Cayman LLCs. This reflects the approach of the Cayman LLC Law to provide that a number of provisions of the Cayman Companies Law shall apply to Cayman LLCs in substantially the same way that they apply to Cayman LTDs.
Jersey’s Draft LLC law does not address the winding up of Jersey LLCs. The Jersey government’s consultation paper with respect to the Draft Jersey Law contemplates that the winding up, dissolution and cancellation of Jersey LLCs will be addressed in separate legislation.
Costs and administrative considerations
Bermuda LLCs are generally less expensive to form and administer than Bermuda LTDs as a consequence of:
- relatively lower government fees – notably, Bermuda LLCs’ annual government fees are not tiered based on the concept of ‘assessable capital’ which is the case with Bermuda LTDs;
- fewer formal requirements are prescribed by the Bermuda LLC act when compared with the Bermuda Companies Act; and
- the possibility of the Bermuda LLC being managed by its members as opposed to a board of directors.
Similar to other Bermuda ‘exempted undertakings’, a Bermuda LLC is required to have a resident representative (an individual or company resident in Bermuda) if the Bermuda LLC’s registered office is not that of a Bermuda fully licensed corporate service provider. It is understood that the position is broadly similar in Cayman. Delaware LLCs are required to appoint a Delaware resident registered agent who is regulated in Delaware – primarily for the purpose of ensuring a genuine registered office and presence in the jurisdiction. In contrast to the position in Bermuda, Cayman Islands and Delaware, Jersey’s Draft LLC Law requires that a Jersey LLC must appoint a secretary.
LLCs are flexible and efficient vehicles that, subject to due diligence and clients’ specific planning considerations, can be formed in a short space of time. LLCs may not always be appealing for those wishing to list securities to raise funding from the public or seek funding from lenders who are accustomed to and comfortable with LTDs whose directors are subject to mandatory statutory duties. However, subject to tax considerations, in many cases in a family office context LLCs may be ideal entities to utilise as holding vehicles, standalone or underlying investment vehicles, investment funds, joint ventures, and vehicles to provide administrative or investment services to other members in the group.
LLCs established under Bermuda, Cayman or Jersey law share a number of features of those created under Delaware law. However, there are some potential material differences. Practitioners advising families may need to consider, for example, the implications of the Cayman LLC expressly being characterised as a body corporate; the Jersey Draft LLC Law expressly providing that Jersey LLCs will not be body corporates; and the availability of a ‘check the box’ election in Jersey. Will the Jersey Draft LLC Law, if implemented in its current form (i.e. imposing duties on managers to act with a view to the best interests of the Jersey LLC), reduce flexibility and alter a fundamental feature of LLCs compared with those formed elsewhere? Alternatively, does the approach of Jersey’s Draft LLC Law in this regard provide clarity and reflect modern expectations? The ability to form series LLCs in Delaware and Jersey to segregate assets and liabilities may be welcome for families wishing to minimise the number of entities in a structure but looking to retain some of the asset protection advantages of doing so. Will this feature be introduced in Bermuda and Cayman in the near future? Will such a statutory segregation of assets and liabilities be respected by the courts of other jurisdictions that do not have comparable LLC laws? Delaware has developed a body of case-law dealing with Delaware LLCs under a backdrop of common law as developed in the United States. This is likely to be of assistance to practitioners and the courts in Bermuda, Cayman and Jersey but, as each of these jurisdictions have different legal histories and Delaware’s LLC Law inevitably has not been mirrored entirely, it may be unlikely that the approach adopted in Delaware’s cases will be adopted verbatim. That said, offshore jurisdictions and their courts are accustomed to being pragmatic and successfully forging ahead when introducing new entity types or variants on existing entity types, such as purpose trusts, segregated account companies, limited partnerships with separate legal personality and foundations. Given the experience in Bermuda to date, it is very likely that high net-worth families will continue to utilise ‘offshore LLCs’ in an offshore structure when planning considerations otherwise permit (and they often will) and will welcome the availability of LLCs in other major offshore jurisdictions.
An original version of this article was first published by The International Family Offices Journal, December 2018.
© Carey Olsen 2018.
Carey Olsen Bermuda Limited is a limited liability company incorporated in Bermuda and approved and recognised under the Bermuda Bar (Professional Companies) Rules 2009. The use of the title "Partner" is merely to denote seniority. Services are provided on the basis of our current terms of business.