Choosing the right structure for your business in Bermuda

A sole proprietorship is owned and controlled by one person, who is not considered a separate legal entity from the business. The owner has unlimited liability, meaning he or she is personally responsible for all the debts and obligations of the business.

The owner must keep separate personal finances and accounts from those of the business.

This type of business is easy and inexpensive to establish and provides the owner with full control over how the business is managed.

However, a sole proprietorship will not be appropriate where an owner is seeking the limited liability offered by other business structures.

Partnerships, which may be general or limited, bring together two or more persons to run a business who are governed by the terms of a partnership agreement, sharing profits and losses according to that agreement.

In a general partnership, partners have unlimited liability, responsible for the debts and obligations of the partnership.

A limited partnership consists of one or more general partners and one or more limited partners. Only the general partners are authorised to transact business and sign for and bind the partnership, and only they have unlimited liability.

Provided that the limited partners do not take part in the management of the limited partnership, they are only liable for the amount each has or has agreed to contribute.

While both general and limited partnerships may elect to have separate legal personality, that does not affect the liability of the partners.

If one or more of the partners does not possess Bermudian status then the partnership must register as an exempted partnership and shall not carry on business in Bermuda, with certain exceptions, including:

• carrying on business with persons outside of Bermuda;
• carrying on business with other exempted entities for business conducted outside of Bermuda;
• dealing in certain securities;
• managing or advising affiliated exempted entities; and
• marketing of shares or dealing with holders of shares of an exempted entity where the exempted entity is a mutual fund.

A partnership can be an ideal structure when two or more persons want to pool their skills and resources into a business.

However, a general partnership will not be appropriate where the partners prefer the limited liability provided by other business structures.

Limited partnerships would likely be more useful for an investment vehicle rather than a trading business.

A company, typically limited by shares, is considered a separate legal entity from the owner. It holds its own assets and incurs its own liabilities.  Shareholders in a company limited by shares are only liable for the amount each has agreed to contribute to the company.

Companies are either local or exempted.

Local companies must meet certain Bermudian ownership requirements and are permitted to conduct business locally and abroad.

If the company does not meet the Bermudian ownership requirements, then the company will be an exempted company, which cannot carry on business in Bermuda without a obtaining a license, with similar exceptions to those noted for exempted partnerships.

Exempted companies are typically international companies incorporated by non-Bermudians, which conduct business outside Bermuda from a place of business here.

The Companies Act 1981 stipulates the regulations by which companies must be established.

A Bermuda company will also be governed by its constitutional documents, being its bye-laws and memorandum of association.

A company is managed by its board of directors; every Bermuda company is required to have at least one director.

The general rule is that directors should act together as a board but typically the board may also delegate certain of its powers to individual directors or to a committee.

Establishing a company protects personal assets should the company incur debt, losses, or legal judgments and provides a professional image to clients and investors.

However, companies have a more structured ownership and management system and are subject to more formalities and regulations compared to other business structures.

They typically have to hold regular meetings, maintain detailed records, and comply with various reporting and disclosure requirements.

Directors have fiduciary duties to the company and its shareholders, requiring careful decision-making and adherence to regulations.

Limited liability companies offer a hybrid structure that combines the flexibility of a partnership with the limited liability protection of a company.

LLCs are governed by the terms of an LLC agreement between its members.

Unlike a limited partnership, members may engage in the management of the limited liability company without the risk of losing limited liability.  Like companies, LLCs are either local or exempted.

LLCs can be member-managed or manager-managed.

In a member-managed LLC, subject to the terms of the LLC agreement, all members share the decision-making and day-to-day operations.

A manager-managed LLC allows members to appoint specific individuals, even non-members, to handle daily operations.

It is even possible to create a board-like structure in the LLC agreement.

An LLC is an ideal structure when the members want the flexibility of governance of a partnership with the limited liability of a company.

Consider seeking professional guidance to determine the structure that best aligns with your business goals.

First Published in The Royal Gazette, Legally Speaking column, April 2024