The Cayman Islands ('Cayman') is set to introduce a new entity ideally suited to professionals looking for the flexibility of a traditional partnership, but with the protection of a separate corporate identity – the Limited Liability Partnership ('LLP'). As well as benefitting those who do business in Cayman, the legislation is drafted widely enough to allow the use of Cayman LLPs internationally.
When will this happen?
The Limited Liability Partnerships Bill 2017 was Gazetted on 31 January 2017 and it is expected to be passed by the Cayman Legislative Assembly later this month, parliamentary time permitting.
So what is an LLP?
An LLP combines elements of a corporate body and a partnership. Like a corporation, an LLP is an entity created and governed by statute which has a separate legal identity from its owners. Unlike a company, an LLP has partners and a partnership agreement rather than shareholders and a memorandum and articles of association.
How is that different to a normal partnership?
The most important difference is that unlike both a general partnership and a limited partnership, an LLP has separate legal identity from its partners. In a general partnership each partner has unlimited joint and several liability for the debts of the partnership and for any misconduct or negligence of one or more of the other partners. That is not the case with an LLP. The LLP itself is liable for its debts and losses and its property will be available to pay those debts and losses.
So is it the same as a Limited Partnership?
No. In a Cayman limited partnership ('LP') the business of the partnership is conducted through the General Partner ('GP'). The limited partners are generally passive investors and risk personal liability if they take part in the management of the business. In an LLP there is no GP and there is no restriction on any partner being actively involved in the day to day operations of the LLP's business.
So who is this for?
An LLP is an ideal vehicle for a professional firm, such as a law firm or accounting firm, which traditionally would have operated as a general partnership. As an LLP, the partners continue to have the flexibility of a partnership structure whilst enjoying protection from personal liability. Importantly, a partner will not be liable for any debt or loss caused by the act or omission of another partner or former partner of the LLP, unless they have assumed an express duty of care to a person and acted in breach of that duty.
So is this just for doing business in Cayman?
Whilst LLPs will benefit professional firms operating in Cayman, there is nothing to prevent the vehicle being used internationally where its characteristics may be attractive for a particular type of business, transaction or project. Where an LLP is not doing business in Cayman, it can apply to the Financial Secretary for a tax exemption certificate, guaranteeing that the LLP will be exempt from any possible future direct taxation.
So how do you become an LLP?
To form an LLP at least two persons must have agreed to carry on a lawful business as an LLP. A general partnership can become an LLP by applying for registration with the Registrar of Limited Liability Partnerships ('the Registrar') and, assuming that the registration application is in order, the Registrar will issue a certificate of registration evidence the formation of the LLP.
Can an existing general partnership become an LLP?
The Bill proposes that an existing general partnership ('Firm') can be converted into an LLP without the complication of having to assign/novate assets and liabilities. The partners in the LLP have to be the same as those in the Firm, with no additions, and notice of the application to convert has to be given in the Cayman Islands Gazette at least twenty-eight days before the planned conversion. The Partners file with the Registrar:
- a consent, signed by all the Partners, that the firm will convert (i.e. transfer all the property interests, rights, debts, obligations)
- an application for conversion, together with any documents the Registrar may specify need to be included.
A fee is paid and if the Registrar is satisfied then a certificate of registration as an LLP is issued. At this point the Firm is dissolved and all the property and interests of the Firm are transferred to the LLP by operation of law.
What happens to existing agreements on conversion?
All proceedings by or against the Firm, all agreements, contracts etc become enforceable by or against the LLP instead of the Firm, and the conversion cannot be treated as either an event of default or as causing any existing agreement to terminate. Unless there is written consent from any person who would be affected, the partners of the Firm remain personally liable for any debt or obligation incurred before or arising from an agreement entered into before conversion. The Bill also proposes that for twelve months after conversion the Firm must include in all correspondence and on all invoices a declaration of the conversion and the name of the Firm.
How do you register as an LLP?
The application to be registered has to include :
- the name (which must include LLP or L.L.P.)
- the address of the registered office (which must be in Cayman)
- the nature of the business to be carried on
- the names and addresses of each of the partners
- which of them, if any, will be a managing partner.
The register of partners must be open to inspection at the registered office by any person during normal business hours. Annual returns will need to be provided stating the names of all partners, and changes in any of the information must be delivered to the Registrar within 30 days of any change. Penalties will apply for default.
How does it work?
The LLP's Partnership Agreement ('Agreement') will govern the rights and duties of the partners as between themselves and third parties, subject to certain restrictions. For example, the Agreement cannot make a partner personally liable for the debts or losses of the LLP, although it can provide an indemnity for individual partners. The Agreement will govern who is eligible to join as a partner, when and how they can retire and whether there will be any restrictions on the ability of partners to assign, transfer or mortgage their interest in the LLP.
When it comes to the LLP's relationships with third parties the Bill provides that partners do not act as agents for each other but as agents for the LLP. A partner will be acting with the authority to bind the LLP if they act in the ordinary course of business or when they are given express authority by the Agreement. An individual partner's actions will not be binding on the LLP where they act without authority and the other party either knows or should know that is the case. The Bill also proposes that the existing rules of equity and common law which apply to general partnerships (as modified by the Partnership Law (2013 Revision)), will apply to an LLP except where they are inconsistent with the express provisions of the new LLP law.
How do you terminate an LLP?
The Bill makes provision for the voluntary and compulsory winding up of an LLP, dissolution and strike-off of an LLP, essentially following the rules for a Cayman ELP, adopting, as modified, Part V of Companies Law and Winding Up Rules 2008. An LLP is automatically wound up if at any time there are fewer than two partners.
Can an LLP be re-domesticated?
Yes. The Bill proposes a procedure (similar to that under the Companies Law) by which an LLP can be re-domesticated to another jurisdiction and a foreign LLP can be re-domesticated to the Cayman Islands.
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.