Minister Gibbons: Limited Liability Company Act

The Limited Liability Company Act 2016 will establish the first new corporate structure in Bermuda in over a century, Economic Development Minister Dr Grant Gibbons said in the House of Assembly on Wednesday [July 13].

“This much anticipated legislation is expected to benefit both local and international businesses in Bermuda. Currently, businesses operating under a limited liability structure in Bermuda are registered as limited partnerships or limited companies,” Minister Gibbons said.

“In the case of limited partnerships, however, protection from personal liability is only afforded to the limited partners. General partners are still subject to unlimited liability with respect to financial obligations arising from activities of the partnership. As such, their personal assets may be used to satisfy their business debts.

“To avoid exposure to liability beyond the amount invested, many business owners choose the existing limited company structure for their business activities. While this structure often works well for international businesses, limited companies may not be as attractive an option for many local businesses.

“The current incorporation process and on-going compliance with the laws governing limited companies in Bermuda can be cost prohibitive for many small business owners. As a result, many Bermudians perform services as sole proprietors. The Bermuda Economic Development Corporation estimates that 70 to 75 percent of the 7000 local businesses on their register are unincorporated, in large part due to the costs associated with registering and operating a limited company.

“The new limited liability company, or LLC, offers broad flexibility and features that are appealing to both local and international business owners. LLCs can be used for most business purposes and are well-suited for ownership by a single member who is seeking the limited liability protection that sole proprietors do not enjoy.”

Minister Gibbons’s full statement follows below:

Mr. Speaker, earlier this month, I introduced in this Honourable House, the Limited Liability Company Act 2016. This significant piece of legislation will establish the first new corporate structure in Bermuda in over a century. As Honorable Members of this House will be aware, the Government has worked diligently to modernize our legislative framework to increase Bermuda’s competitiveness and gain advantages on other jurisdictions wherever possible. The Bill being debated today is a continuation of this effort.

Mr. Speaker, this much anticipated legislation is expected to benefit both local and international businesses in Bermuda. Currently, businesses operating under a limited liability structure in Bermuda are registered as limited partnerships or limited companies. In the case of limited partnerships, however, protection from personal liability is only afforded to the limited partners. General partners are still subject to unlimited liability with respect to financial obligations arising from activities of the partnership. As such, their personal assets may be used to satisfy their business debts.

To avoid exposure to liability beyond the amount invested, many business owners choose the existing limited company structure for their business activities. While this structure often works well for international businesses, limited companies may not be as attractive an option for many local businesses.

The current incorporation process and on-going compliance with the laws governing limited companies in Bermuda can be cost prohibitive for many small business owners. As a result, many Bermudians perform services as sole proprietors. The Bermuda Economic Development Corporation estimates that 70 to 75 percent of the 7000 local businesses on their register are unincorporated, in large part due to the costs associated with registering and operating a limited company.

Mr. Speaker, the new limited liability company, or LLC, offers broad flexibility and features that are appealing to both local and international business owners. LLCs can be used for most business purposes and are well-suited for ownership by a single member who is seeking the limited liability protection that sole proprietors do not enjoy.

The Bermuda LLC will be a hybrid entity that includes features of both limited companies and partnerships. Similar to both companies and partnerships that so elect, LLCs have a legal existence separate and distinct from its owners, commonly referred to as members. As is the case with shareholders in a limited company, LLC members, are generally not personally liable for financial obligations of the LLC.

Consistent with partnerships, LLCs are governed by contractual agreement amongst the members. However, any LLC member may participate in the day to day management and operations of the LLC without losing the liability protection offered by this structure; and there are limited statutory formalities that apply to the management and operation of an LLC. This results in lower overall costs for forming and operating an LLC as compared to a limited company.

Mr. Speaker,as I had previously informed this Honourable House, LLCs are well known amongst US law firms as a vehicle of choice for private equity funds and asset holding structures.In Delaware alone, there are nearly 800,000 active LLCs, with just over 180,000 being formed since the start of 2015.

LLCs are also utilized in some offshore jurisdictions such as the Isle of Man, Anguilla and the Marshall Islands. LLCs have also recently been introduced in the Cayman Islands. The popularity of LLCs is based on market demand by persons and entities seeking the same flexibility and protection offered by this corporate structure that Bermuda businesses will soon be able to enjoy.

Mr. Speaker,there are few discernible risks to Bermuda in relation to introduction of an LLC product. LLCs will be subject to the same global standards regarding transparency and record-keeping that other Bermuda entities currently observe. They will also be governed by local regulatory requirements in relation to their business activities,as appropriate. Given the prominence of LLCs in the US and their recent introduction and on-going use in some competitor jurisdictions, failure to establish an LLC product in Bermuda will result in the loss of business opportunities, particularly,for US based clients.

This new corporate product will help position the island to capture a larger share of the offshore private equity market,which will be beneficial to Bermuda’s economy and will help generate additional Government revenue. Based on the demonstrated preference for the features of an LLC in the funds industry, this is yet another opportunity to show Bermuda’s responsiveness to market demand.

A strong private equity and funds market will stimulate other areas of our economy by increasing the demand for services in other areas such as law, accounting, compliance, investment management and administration. As such, the benefits of introducing LLCs in Bermuda will be enjoyed by local and international businesses and clients seeking this very familiar and useful product in an offshore market. The Bermuda LLC is very likely to be a popular corporate product which can help enhance Bermuda’s reputation as a premier offshore financial centre.

Mr. Speaker, this Bill is another successful product of close collaboration between the Government and the private sector, and in particular, the Legal Focus Group of the Bermuda Business Development Agency.

In closing, I would like to thank the members of the Legal Focus Group for their continued work to bring forth law reform proposals that assist the Government in its efforts to enhance our legal framework. I would specifically like to thank the law firm of Conyers Dill & Pearman for the substantial resources they dedicated to this initiative.

I would also like to thank the Bermuda Monetary Authority, Registrar of Companies and the National Anti-Money Laundering Committee for their contribution to this project. Finally, I would like to thank the team at the Attorney-General’s Chambers and the Ministry of Economic Development’s Business Development Unit for their tireless efforts, hard work and dedication in bringing forth this significant and historic piece of legislation.

Thank you, Mr. Speaker.

Mr. Speaker, I move that this Bill be referred to Committee.

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