Limited liability companies in the Cayman Islands

How to set up an LLC in the Cayman Islands

LLC FORMATION AND REGISTRATION

In order to form an LLC, the initial member (or members) will need to file a registration statement with the Registrar of Limited Liability Companies (Registrar). The registration statement sets out the LLC’s name (along with any dual foreign name and its translation), the nature of its business, the address in the Cayman Islands of its registered office, its financial year end, its term (or, if formed for unlimited duration, a statement to that effect) and the names and addresses of the members who hold an interest in the LLC. It also contains a declaration that the LLC will not undertake business with the public in the Cayman Islands other in furtherance of its business outside the Islands as contemplated by the LLC Act. Subject to this restriction (and subject to any restriction that may be imposed under its LLC agreement), an LLC may carry on any lawful business, purpose or activity, whether or not for profit.

Upon the filing of the registration statement meeting the statutory requirements and the payment of a fee, the Registrar will issue a certificate of registration.

NATURE OF A LIMITED LIABILITY COMPANY

The LLC is a body corporate with legal personality separate from that of its members. It is capable of exercising all the functions of a natural person of full capacity irrespective of any questions of corporate benefit. An LLC has perpetual succession, the capacity to sue and to be sued and defend legal proceedings in its name, and the power to acquire, hold and dispose of property.

MEMBERS

An LLC must have at least one member at all times.

Subject to any express provisions of the LLC agreement to the contrary, a member does not owe any duty (fiduciary or otherwise) to the LLC or any member in exercising any of its rights or authorities in respect of the LLC or in performing any of its obligations under the LLC agreement. Where a member is exercising any vote, consent or approval right in respect of its LLC interest, it may do so in its own best interests and as it sees fit even though it may not be in the best interests of the LLC.

MEMBER’S INTERESTS

Unless otherwise provided in the LLC agreement:

• a person admitted to the LLC as a member may receive an interest in or be granted other rights in respect of the LLC without making a contribution or being obligated to make a contribution to the LLC (subject to any provisions of the LLC agreement or the LLC Act requiring amounts to be paid or property to be returned by the member to the LLC);
• a member has no pre-emptive right to subscribe for any issue of LLC interests or for any other interest in the LLC;
• a member’s interest in the LLC may (but need not) be evidenced by a certificate of the LLC;
• a member may grant a security interest to a third party (secured party) in respect of the member’s interest and any such security interest does not cause the member to cease to be a member or to cease to have the power to exercise any rights or powers of a member (other than those rights or powers which are the subject of the security interest, which security interest has become enforceable and in respect of which the LLC has received express notice at its registered office, such notice being signed by each of the secured party and that member) unless that member transfers all of the member’s LLC interest to the secured party in accordance with the provisions of the LLC Act; and
• an LLC may acquire, by purchase, redemption or otherwise, an LLC interest or other interest of a member in the LLC, provided that immediately following such acquisition, the LLC is able to pay its debts as they fall due in the ordinary course of business.

The LLC Act prohibits the issue of bearer LLC interests, bearer certificates or bearer coupons.

MEMBER’S CONTRIBUTIONS

The liability of a member to contribute to the assets of an LLC is limited:

• to the amount of the member’s contribution;
• to making such other payments or performing such services as are expressly set out in the LLC agreement or as have otherwise been agreed between the member and the LLC; and
• to such other amounts as may be required to be paid or property required to be returned by the member to the LLC pursuant to the LLC agreement or the LLC Act.
  Contributions may be in cash, property, other assets, services rendered or other obligation to contribute cash or property or assets or to perform services.

ALLOCATIONS AND DISTRIBUTIONS

The profits and losses of an LLC are allocated (and distributions of cash or in kind by the LLC are made or paid) among the members, and among classes of LLC interests or groups of members (if any), in the manner provided in the LLC agreement. If the LLC agreement does not so provide, profits and losses are allocated (and distributions are made or paid) on the basis of the agreed value of the contributions made by each member.

A dividend may only be made if the LLC is solvent, meaning that it is able to pay its debts as they fall due in the normal course of business. If a member receives a dividend knowing that the LLC is insolvent, the member will be liable for the amount of the distribution.

MANAGEMENT

Unlike a company, an LLC does not have a board of directors. Instead, management of an LLC is vested in its members acting by a majority in number. However, the LLC agreement may vest management in one or more managers if preferred. If permitted by the LLC agreement, a manager may also be a member.

The rights and duties of the members and managers in an LLC are determined by the LLC agreement and, unless otherwise provided in the agreement, each member and manager has the authority to bind the LLC. An LLC agreement may provide for classes or groups of managers having such relative rights, powers and duties as that agreement may provide and may make provision for the future creation of additional classes or groups of managers having such relative rights, powers and duties as may from time to time be established.

Subject to any express provision of the LLC agreement to the contrary, a manager does 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 to act in good faith in respect of the rights, authorities or obligations which are exercised or performed or to which such manager or member is subject in connection with the management of the LLC.

LIMITED LIABILITY COMPANY AGREEMENT

The LLC agreement is of critical importance to an LLC. It fleshes out the bare bones of the LLC Act, setting out the rights and duties of members, the procedures for being admitted to or retiring from the LLC and transferring or encumbering members’ interests, the making and treatment of members’ contributions, the allocation of profits and losses and distributions, the appointment of managers, the duties and liabilities of the managers, the execution of documents on behalf of the LLC, procedures for calling and holding meetings of managers or members, winding-up provisions, and so on.

While the members have great flexibility in deciding what to provide for in their LLC agreement the LLC Act expressly states that an LLC agreement may, among other things:

• provide for classes of LLC interests or groups of members having specified rights, powers and duties;
• provide for the taking of an action, including amendment of the LLC agreement or the creation under the provisions of the LLC agreement of a new class of LLC interest or group of members, without the vote or approval of any member or class or group of members;
• provide that any member or class of LLC interests or group of members 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 the members or managers, on any matter (with voting by members on a per capita, number, financial interest, class, group or any other basis); and
• provide that the vote, consent or approval of a member is deemed to have been obtained or given to a matter where:
  • the member is given notice of the matter in accordance with the provisions of the LLC agreement;
  • the LLC agreement requires that, should the member not wish to vote in favour of or otherwise consent to or approve the matter, the member give notice to the LLC of such within a particular period of time; and
  • the member does not give notice, in accordance with the LLC agreement, to the LLC that it does not wish to vote in favour of or otherwise not consent to or approve the matter within the particular period of time.

The LLC Act stipulates that the LLC agreement must be governed by Cayman Islands law.

LIABILITY FOR DEBTS, OBLIGATIONS AND LIABILITIES

The debts, obligations and liabilities of an LLC (whether arising in contract, tort or otherwise) are solely the debts, obligations and liabilities of the LLC. No member or manager is obligated personally for any of the LLC’s debts, obligations and liabilities solely by reason of being a member or acting as a manager of the LLC. However, a member or manager may agree to be personally liable for any or all of the debts, obligations and liabilities of the LLC.

REGISTERED OFFICE, REGISTERS AND BOOKS OF ACCOUNT

An LLC must have and maintain a registered office in the Cayman Islands. The registered office service provider must be licensed.

An LLC must maintain:

• a register of members which contains the name and address of each person who is a member of the LLC, the date on which that person became a member and the date on which they ceased to be a member (which register is to be updated within 21 days of any change in the particulars in the register) and information on the interest held by each member, including group or class, voting rights and whether such rights are conditional;
• a register of security interests (which is to be updated within 21 days of receipt of a validly served notice);
• a register of managers which contains the name and address of each person in whom management of the LLC is vested; and
• a register of mortgages and charges.

Certain LLCs and other companies are also required to maintain a register of beneficial owners. Those that are listed or are a subsidiary of an entity listed on the Cayman Islands Stock Exchange or an approved stock exchange, as well as those licensed under one of the Cayman Islands’ regulatory laws, or registered with the Cayman Islands Monetary Authority as a mutual fund or private fund are not required to keep this register. If an LLC does not fall within one of these categories, its register of beneficial owners will include information on all those individuals who, directly or indirectly, own or control 25% or more of the LLC interests or voting rights, or who otherwise exercise ultimate effective control over the management of the LLC. Where a beneficial owner’s interest is held through an ownership chain of Cayman Islands entities, those entities may also need to be entered on the register. The register is not open to the public.

The LLC Act imposes on an LLC the obligation to cause to be kept proper books of account, including a record of the contributions of, and distributions to, each member.

INSPECTION OF DOCUMENTS

A list of the current managers of an LLC (if there are any) is available for physical inspection at the office of the Registrar, on payment of a nominal fee. The Registrar shall make available for inspection by any person (on payment of a fee of KYD50) the information set out in the LLC’s registration statement (see “Formation and Registration” above), subject to such conditions as the Registrar may impose.

CONVERSION TO A LIMITED LIABILITY COMPANY

The LLC Act permits an exempted company that is not a segregated portfolio company to make application for conversion to (and re-registration as) an LLC.

WINDING-UP OF A LIMITED LIABILITY COMPANY

The LLC Act provides for the winding up of an LLC either voluntarily or compulsorily by the Court. The death, retirement, withdrawal, expulsion, bankruptcy, liquidation or dissolution of any member or the occurrence of any event that terminates the continued membership of any member does not cause an LLC to be voluntarily wound up, except where that event is an event of dissolution in the LLC agreement or where the event would result in the LLC having no members.

TAX AND EXCHANGE CONTROLS

There is no Cayman Islands taxation on the profits, income or dividends of an LLC, nor is there any capital gains tax, estate duties or inheritance tax under Cayman Islands law. An LLC may apply to the Financial Secretary at the Ministry of Finance & Economic Development of the Cayman Islands for a written undertaking that should a law ever be enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations, that law shall not apply to the LLC or any member of the LLC in respect of the LLC’s operations or assets or the membership interest of any member. This undertaking may be granted for up to 50 years from the date of the undertaking, but is normally granted for a shorter period in the first instance. The undertaking may also provide that these taxes and any tax in the nature of estate duty or inheritance tax shall not be payable in respect of the obligations of the LLC or the interests of members therein. There are no exchange controls in the Cayman Islands, which allows free transfer of funds in and out of the Islands, in any currency, with equal freedom to open and maintain accounts in any currency.

CONCLUSION

The limited liability company as a form of business entity has become very popular in the United States as well as in many other countries, albeit under different names (for example, Germany’s GmbH, the Netherlands’ B.V. and the S.à.r.l. of France and Luxembourg). As such, we expect that Cayman Islands LLCs will be very attractive vehicles for many clients. While LLCs are still relatively new to the Cayman Islands, we are already seeing them being used for joint ventures, group restructuring entities, general partners, carried interest vehicles, asset holding, special purpose vehicles and investment management companies.