One of the most significant pieces of legislation introduced in
the Cayman Islands last year was the Limited Liability Companies
Law, 2016 which was enacted in June 2016 and commenced on 8 July
2016. In Asia, the limited liability company ("LLC")
hasn't been flying off the shelves just yet but gradually we
are seeing more and more interest. Practitioners would be well
placed to understand some of the advantages of the LLC so as to be
able to present this option to clients when appropriate to do
In a nutshell, an LLC is a hybrid entity incorporating
characteristics of a partnership and a company. Unlike a
partnership, it has separate legal personality. The members of an
LLC, like the shareholders of an exempted company, will have
limited liability and 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 constituting the LLC. It
is similar, but not the same, as its Delaware counterpart.
Given its hybrid nature it has far greater flexibility than a
company, particularly in two key areas: in respect of its
management and organisation and in the manner in which it can
allocate profits and losses.
Unlike an exempted company, an LLC will not have a share
capital. Instead, members will be issued interests or classes of
interests. This will allow for flexible internal accounting and
record keeping whereby an LLC member may have a capital account and
make capital contributions in accordance with the LLC Agreement (in
a manner similar to a partnership).
The members of an LLC may agree amongst themselves how the
profits and losses of the LLC are to be allocated and how and when
distributions are to be made, which may be on a non-pro rata basis.
This might be useful where, for example, the LLC Agreement provides
for tax distributions which would be on a non-pro rata basis given
that distributions are made at different times to meet tax
liabilities of the members. This is difficult to mirror in a
corporate structure where distributions on shares of the same class
would need to be made pro rata.
The agreement by which an LLC is governed, the "LLC
Agreement", can provide for classes or groups of managers with
differing rights, powers and duties and managers may be permitted
to act in the best interests of a particular member. Therefore the
LLC can be extremely useful for joint venture arrangements and
might prove a favourable choice when establishing the manager or
general partner of a fund.
Whether a Cayman LLC will be tax transparent or tax opaque will
be a matter for the relevant onshore jurisdiction. There may be a
degree of flexibility under the onshore jurisdiction's tax law
to treat a Cayman LLC as either depending on the drafting of the
LLC Agreement. It will be necessary to check with relevant tax
advisors that the desired tax treatment will apply.
The introduction of the law demonstrates the continued ability
of the Cayman Islands to be flexible and responsive to market needs
and should reinforce the Cayman Islands' position as a domicile
of choice for offshore investment funds and structuring
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.
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