Cayman Islands Limited Liability Companies

Preface

This publication has been prepared for the assistance of those who are considering the formation of limited liability companies in the Cayman Islands pursuant to the terms of the Limited Liability Companies Act (2023 Revision). It deals in broad terms with the requirements of Cayman Islands law for the establishment and operation of such entities. It is not intended to be exhaustive but merely to provide brief details and information which we hope will be of use to our clients. We recommend that our clients and prospective clients seek legal advice in the Cayman Islands on their specific proposals before taking steps to implement them.

Before proceeding with the incorporation of a limited liability company in the Cayman Islands, persons are advised to consult their tax, legal and other professional advisers in their respective jurisdictions.

Persons considering establishing limited liability companies to carry on insurance or mutual fund business should request separate publications prepared by Conyers on these topics.

Conyers

1. INTRODUCTION

The principal statute governing the formation and operation of limited liability companies (each an "LLC") in the Cayman Islands is the Limited Liability Companies Act (2023 Revision) (the "Act").

An LLC is a body corporate with legal personality separate from that of its members, capable of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit. An LLC has perpetual succession, the capacity to sue and be sued in its own name and the power to acquire, hold and dispose of property. Any one or more persons may form an LLC for any lawful business, purpose or activity, whether or not for profit, provided that there is always one member.

An LLC is essentially a hybrid entity combining many of the characteristics of existing Cayman Islands exempted companies and exempted limited partnerships. LLCs do not have share capital, member liability is limited and capital accounts are permitted. Similar to exempted limited partnerships, members may set out in the LLC agreement how profits and losses are allocated and how and when distributions are made.

2. PRE-REGISTRATION MATTERS

2.1 Company Name

The proposed name of the LLC can be reserved with the Registrar of Limited Liability Companies (the "Registrar") for up to one hundred and twenty days. No LLC may be registered with a name that is the same as, or substantially similar to, the name of another company on the register. The use of certain words in company names such as "royal", "chartered" and "bank" is restricted.

The name of an LLC may, but need not, contain the words "Limited Liability Company" or the abbreviation "L.L.C." or "LLC". We do, however, recommend that the name includes one such designation to distinguish the LLC from other corporate entities.

An LLC may be registered with a dual name in a foreign script. There is no requirement that the dual name be a translation of the company's English name.

2.2 Contracts

Where a person purports to enter into a contract in the name of, or on behalf of, an LLC which has not yet been registered, he or she will be personally liable under the contract unless the agreement itself provides otherwise. However, an LLC may ratify the contract and, by doing so, will become bound by and entitled to the benefits set out in the contract from the date of registration of the LLC. Such ratification by the LLC will have the effect of releasing the person who purported to act on the LLC's behalf from personal liability.

3. FORMATION AND REGISTRATION

3.1 Registration

Registration of an LLC is effected by filing with the Registrar a registration statement signed by or on behalf of any person forming the LLC and the payment of a prescribed fee. The registration statement is required to state the name of the LLC and, if applicable, the foreign name, the address in the Cayman Islands of the registered office, names and addresses of initial members, the nature of business, the financial year end, the term if not formed for an unlimited duration, together with 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 that LLC outside of the Cayman Islands.

If an LLC carries on any business in the Cayman Islands in contravention of this requirement then, without prejudice to any other proceedings, the LLC and every manager of the LLC who is responsible for the contravention commits an offence and is liable on summary conviction to a fine for every day during which the contravention occurs or continues, and the LLC shall be liable to be immediately dissolved and removed from the Register at the discretion of the Registrar.

The Registrar will make the registration statement available for inspection by any person upon payment of a fee.

If, during the continuance of the LLC, any change is made or occurs in any of the LLC's particulars as set out in the LLC's registration statement, the LLC must file a certificate of amendment to the registration statement with the Registrar specifying the nature of the change and provide such statement to the Registrar within thirty (30) days of the change.

Any LLC that is in default of the requirement to provide notice of the change in particulars will incur a penalty for each day that the default continues which penalty shall be a debt due to the Registrar.

3.2 Registered

Office An LLC is required to maintain a registered office in the Cayman Islands for the service of process and to which all notices and communications may be addressed. An LLC may, subject to the terms of the LLC Agreement, change the address of its registered office to another permitted address in the Cayman Islands. The LLC is required to notify the Registrar within thirty (30) days of that change and pay the prescribed fee. An LLC that carries on business without having a registered office in the Cayman Islands incurs a penalty of CI$200/US$244 for every day during which its business or affairs is so carried on.

4. MEMBERSHIP

In connection with the formation of an LLC, a person that is to be admitted as an initial member of the LLC is admitted upon the registration of the LLC. After the formation of the LLC, a person may be admitted as a member either by being issued with an LLC interest, or upon a transfer of an LLC interest, through a plan of merger or consolidation or in connection with the continuation of a foreign entity as an LLC in the Cayman Islands. Provided that all the requirements for admission contained in the LLC agreement have been met, any such person, howsoever admitted, will, without further actions or formalities, be deemed to have become a member and agreed to be bound by the terms of the LLC agreement from that date as if that person and all existing members and other parties to the LLC agreement had duly executed and delivered the LLC agreement.

A person ceases to be a member of an LLC upon the happening of any event provided for in the LLC agreement.

4.1 Members' Contributions

The liability of a member to contribute to the assets of an LLC is limited to the amount that the member has undertaken to contribute, whether in the LLC agreement or otherwise. Subject to the LLC agreement, no member or manager of an LLC is personally liable for any debt, obligation or liability of the LLC solely by reason of being a member or acting as a manager of the LLC.

Subject to the LLC agreement, a person may receive an LLC interest or be granted other rights in respect of the LLC without making any contribution or being obligated to make a contribution to the LLC.

Subject to the LLC agreement, a member may grant a security interest to a third party in respect of any or all of the LLC interest of that member. Any such security interest has priority according to the time that written notice of the security interest, signed by the secured party and the relevant member, is validly served at the registered office of the LLC.

4.2 Transfer of Membership Interests

An LLC interest is capable of being transferred in whole or in part in accordance with the Act and the provisions of the LLC agreement. An assignee of a member's LLC interest who is not admitted as a member has no right to participate in the management of the business or affairs of the limited liability company except as provided in an LLC agreement or otherwise upon the approval of all of the members and in compliance with the terms of the LLC agreement. Subject to the LLC agreement, unless and until an assignee of an LLC interest becomes a member, the assignee has no liability as a member solely as a result of the assignment.

4.3 Distributions to Members

The profits and losses of an LLC and distributions of cash or in kind by an LLC are allocated or paid among the members in the manner provided in the LLC agreement. Subject to the LLC agreement, the profits and losses and distributions of an LLC are allocated on the basis of the agreed value of the contributions made by each member. An LLC may not declare, make or pay a distribution, or release a member from any obligation to the LLC if, at the time of such distribution or purported release, the LLC is, or would as a result be, unable to pay its debts as they fall due in the ordinary course of business. A member who receives a distribution, or is purportedly released from an obligation in violation of this solvency test and who had actual knowledge of the violation at the relevant time, is liable to the LLC for the amount of such distribution or for the performance of the obligation purportedly released.

5. MANAGEMENT

The LLC agreement, which need not be filed with the Registrar, governs the LLC's business and affairs. Management of the LLC is vested in its members acting by a majority in number unless the LLC agreement provides for all or part of the management to be vested in a manager or managers. Unless the LLC agreement provides otherwise, the members acting by a majority in number or a manager appointed in accordance with the LLC agreement shall have the ability to bind the LLC. The rights and duties of the members and managers in an LLC are, as between themselves, to be determined by the LLC agreement.

Subject to the LLC agreement, members, managers and board or committee members do not owe any duty (fiduciary or otherwise) to the LLC or any member or other person in respect of the LLC other than a duty of a manager to act in good faith. A member may in exercising any vote, consent or approval right, act in its own best interests and as it sees fit even though it may not be in the best interests of the LLC or any other member. Board and committee members may, if expressly permitted by the LLC agreement, act in the best interests of a particular member or members, even if not in the best interests of all members or the LLC itself.

A manager of an LLC may also, if permitted by the LLC agreement, be a member.

6. LIMITED LIABILITY COMPANY AGREEMENT

The Act imposes a requirement that the member or members of an LLC enter into an LLC agreement to regulate the business or affairs of the LLC. The LLC agreement must be governed by Cayman Islands law. The LLC will be bound by the terms of the LLC agreement whether or not it is signed by the LLC. An LLC agreement may be entered into at any time before, after or at the time of the filing of a registration statement and, if entered into before such filing, is deemed to be effective on the date of registration of the LLC.

The Act, however, affords flexibility to the members to agree among themselves the internal workings of the LLC, with appropriate minimum safeguards. For example, an LLC agreement may:

• give indemnities to any member or manager or other person from and against any liability; " provide that a member or manager who fails to perform in accordance with the LLC agreement shall be subject to specified remedies, sanctions or consequences;
• provide for classes of LLC interests;
• provide for the taking of an action, including the amendment of the LLC agreement, without the vote or approval of any member or class of LLC interest or group of members and may provide that any member or class of LLC interests or group of members shall have no voting rights;
• grant to all or certain identified members or a specified class of LLC interest or group of members, the right to vote separately or with all or any class of LLC interest or group of members or managers on any matter;
• provide that voting shall be on a per capita, number, financial interest, class, group or any other basis.

The Act provides considerable flexibility on how approvals or consents of members may be obtained. For example, on a matter to be voted on, consented to or approved by members, unless otherwise provided for in the LLC agreement, the matter may be dealt with without a meeting, without prior notice and without a vote by consent in writing, signed by the members having no less than the minimum number of votes that would be necessary to authorise or take such action at a meeting at which all members entitled to vote thereon were present and voted.

7. ECONOMIC SUBSTANCE

The International Tax Co-Operation (Economic Substance) Act (2024 Revision) (the "ES Act") applies to a defined class of relevant entities including exempted companies and exempted partnerships, foreign companies and foreign partnerships registered in Cayman, LLCs, general partnerships (other than local partnerships) and limited liability partnerships that are required, subject to what is said below, to maintain economic substance in the Cayman Islands unless they are (i) tax resident outside the Cayman Islands; (ii) an investment fund (including entities through which any such fund invests or operates); or (iii) a notfor-profit company.

The ES Act requires that all Cayman Islands entities notify the Cayman Tax Information Authority ("TIA") of, amongst things, whether or not it is carrying on a "relevant activity" (as defined in the ES Act and as discussed further below) and, if so, whether or not it is a "relevant entity".

The notification to the TIA is by way of an annual Economic Substance Notification ("ESN") which must be filed prior to an entity filing its annual return with the General Registry's Corporate Administration Portal ("CAP").

A relevant entity is subject to the ES Act from the date on which it commences a relevant activity. Noncompliance with the ES Act will result in significant financial penalties and continued non-compliance may result in an application by the TIA to the Grand Court for an order that the entity is defunct.

7.1 Relevant Activities

Relevant entities will be required to meet the economic substance test ("ES Test") in respect of their relevant activities in the Cayman Islands. The categories of relevant activities include the following which are further defined in the ES Act:

1. Banking business;
2. Distribution and service centre business;
3. Financing and leasing business;
4. Fund management business;
5. Headquarters business;
6. Holding company business;
7. Insurance business;
8. Intellectual property business; and
9. Shipping business.

7.2 Economic Substance Requirements

For relevant entities carrying on relevant activities, the ES Act requires that they:

1. conduct core income generating activities ("CIGAs") (see further below) in relation to the relevant activity;
2. be directed and managed appropriately in the Cayman Islands related to the relevant activity; and
3. with regard to the level of relevant income from the relevant activity carried out in the Cayman Islands, have an adequate –
   1. amount of operating expenditure incurred in the Cayman Islands;
   2. physical presence (including maintaining a place of business or plant, property and equipment) in the Cayman Islands; and
   3. number of full-time employees or other personnel with appropriate qualifications in the Cayman Islands.

Relevant entities carrying on the business of a pure equity holding company (one that only holds equity participations in other entities and only earns dividends and capital gains) will have reduced requirements such that they will need to comply with all filing requirements under the Act and have adequate human resources and premises in the Cayman Islands for holding and managing equity participations in other entities.

Each relevant entity that is carrying on a relevant activity and is required to satisfy the ES Test will be required to file an annual return with the TIA in respect of their status under the ES Act.

7.3 Core Income Generating Activities

CIGAs are defined in the ES Act to mean activities that are of central importance to a relevant entity in terms of generating income and that are being carried out in the Cayman Islands. CIGAs may be outsourced provided that the relevant entity is able to monitor and control the carrying out of the CIGA. The TIA will only accept the relevant entity's claim to have satisfied the ES Test by means of domestic outsourcing if the information is verified by the service provider. Such verification must be made within thirty days of the relevant entity providing the same information to the TIA.

Service providers undertaking outsourcing functions are required to register with the DITC so that the DITC can independently verify the engagement and nature of the services provided.

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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.