September 24, 2021

Cayman Islands provides greater flexibility by proposing the LLC

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cta-logoFrom Arthur Bell CPAs

The Cayman Islands has long been a jurisdiction of choice to establish offshore entities for fund managers and others in the alternative investment industry. In December 2015, the Cayman Islands government moved to strengthen this position by creating a new choice of legal entity. The Cayman Limited Liability Company (Cayman LLC), as proposed in the Limited Liability Companies Bill, 2015 (the Bill), is generally comparable to the Delaware LLC, and should provide greater synergies with onshore entities as well as efficiencies in administration and governance of Cayman-based funds.

The Cayman LLC is a hybrid of the exempted company and exempted partnership options currently available to fund managers launching a Cayman fund. As such, the Cayman LLC attempts to correct certain structural limitations of the existing entity types. For example, an exempted company structure provides a legal entity separate from its shareholders, but lacks flexibility in governance structure (e.g., required to maintain share capital records to which fund accounting needs to be adapted or reconciled). Alternatively, an exempted limited partnership is not share based, and allows for more contractual flexibility within the governing documents. However, the exempted limited partnership is not a separate legal entity, and therefore requires a separate general partner entity to manage the limited partnership.

Cayman LLC Key Features

The Cayman LLC offers more flexibility when designing a fund’s structure and governing documents. When reviewing options for the offshore fund, managers should consider if the following features of the Cayman LLC are better suited to meet the needs of the manager and investors:

  1. A separate legal personality (unlike the Cayman exempted limited partnership). This allows the entity to be member managed (by some or all of its members) or provide for the appointment of other persons (who may not be members) to manage the business of the entity.
  2. Freedom of contract among members to determine the internal operations of the company (unlike the Cayman exempted company). Specifically, members can have capital accounts and can agree amongst themselves (in the LLC agreement) how the profits and losses are to be allocated and how and when distributions are to be paid. In a master-feeder structure, the governing documents of the Cayman LLC can mirror and/or be based on a corresponding onshore fund.
  3. Pass-through treatment for income tax reporting, as with the exempted partnership.
  4. Limited liability for members.

Advantages of the Cayman LLC

The Cayman LLC is expected to have a significant impact on the alternative investment industry by becoming a popular entity choice for offshore funds because of the many advantages it provides to managers, such as:

  1. One legal concept to understand and manage: U.S. investors and managers looking for familiarity of structures will appreciate that the Cayman LLC is similar to the Delaware LLC, resulting in less education for the manager. If the manager already has a Delaware LLC, it should be a streamlined process to work with legal counsel and form the Cayman LLC. Under the Bill, existing Cayman corporations and other foreign corporations will be able to convert or merge into a Cayman LLC. However, an exempted partnership would not be able to convert into a Cayman LLC.
  2. Simplified fund administration: Managers and administrators will find that tracking each member’s investment and capital account, along with calculating and striking a NAV, is easier than dealing with share structure. As a result, there may be less administration burden due to less reporting.
  3. Flexible governance: The manager of a Cayman LLC may or may not be a member of the entity. Plus, since a separate board of directors is not required for a Cayman LLC, managers could save costs without the need for external directors. However, if a fund is registered under the Cayman Island Mutual Fund Law, we would expect the need for two managers, which would satisfy the requirement for two directors that the Cayman Island Monetary Authority usually expects for registered funds. Note: these two managers would not need to be independent of the fund.
  4. Tax benefits:
  • Forming the offshore feeder fund and the master fund as Cayman LLCs could simplify the process of claiming income tax treaty benefits since the individual members, not the entity, will be considered for treaty eligibility.
  • The Cayman LLC should be eligible to make an election to be taxed as a corporation for U.S. federal income tax purposes, which would allow the LLC to act as a blocker against unrelated business taxable income “UBTI.” However, if this election is in place, the entity, not the individual investors, will be considered for treaty eligibility for income tax treaties to which the U.S. is a party.

When Cayman LLC Might Not Be Preferred

One significant difference when compared to a Delaware LLC, is that the Cayman LLC does not initially provide for separate series with segregated assets and liabilities (a popularly used feature of Delaware LLCs). Fund managers needing this level of separation in a Cayman-based entity will still need to utilize the Cayman Separated Portfolio Company (SPC) structure.

Conclusion

As the Cayman Islands is expected to enact the Bill soon, you should consider reviewing your fund structure with legal counsel to determine whether any compliance efficiencies can be achieved by utilizing the Cayman LLC. Arthur Bell advisors can walk you through the various accounting and tax issues involved with forming, merging, or converting your fund to a Cayman LLC. Please contact your Arthur Bell advisor at 855-787-0001 or via email at [email protected] in the planning stages of your Cayman LLC so that we can help you gain the most benefit from your new Cayman LLC structure.

SOURCE: http://www.arthurbellcpas.com/news/2016/03/cayman-provides-greater-flexibility-by-proposing-the-llc/

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