If you are searching for a legal domicile for your business, it might be overwhelming due to the many options you have. Cayman Islands Limited Liability Company (LLC) has increased in popularity in recent years for many benefits it provides. It could be the right one for your business.
A Cayman Islands LLC shares many similarities with a Delaware LLC regarding, for example, the formation, managing structure, legal status, capital structure. Still, there are some characteristics that make the LLC distinct from a Delaware LLC.
BBCIncorp makes it clear for you to better understand about the main features and significant matters of a Cayman LLC.
1. Brief introduction of Cayman LLC key features
Cayman Islands LLC is a hybrid entity which combines the limited liability of a corporation and the pass-through tax structure of a partnership or sole proprietorship.
Ownership structure. One key feature of Cayman LLC is the flexibility in ownership structure. The management is usually given to its members, but managers outside the company are also qualified to govern the company. A private internal operating agreement, known as LLC agreement, is finalized by all members to manage the appointment of the managers and internal corporate matters.
Separate legal entity. The LLC is well-known for its separate legal entity. There is no limit to the number of members in the company. The limited liability of its members are protected. They insulate from liability beyond their investment and capital contributions. The company is also not liable for its member’s debts to creditors.
Limited liability. As per the legality of Cayman LLC, its members are not personally obligated for the company’s debts or financial obligations. The liability is limited to their contribution to LLC assets by cash, property or services. Such contributions are included in the LLC record or agreed by the company’s members. However, it is possible for them to be liable for the business debts if they agree to do so.
Corporate anonymity. One thing that many businesses take into account is the company's privacy. In the Islands, it is not required for the disclosure of business owners’ personal information. In this way, the company can keep their ownership information confidential for its business advantages.
Simple setup. Cayman Islands LLC cost for the registration is one plus point for the incorporation. The process is simple and cost-efficient. For other business entities in the Islands, the formation process is more complicated and costly compared to the LLC.
2. Cayman Islands LLC formation
The formation of Cayman LLC is similar to Delaware LLC in terms of the simplicity.
A registered office is compulsory for all LLCs in the Islands to process the formation. The office is defined as the official physical address of the company to receive official notices and communications. The office must be notified to the Registrar – a public authority which is responsible for managing the company register. A Cayman LLC that does business or affairs without a registered office will be subject to a penalty of $200 per day from the date of notice receipt.
To form a Cayman Islands LLC, at least one member is required and there is no limit to the number of members. The registration statement needs to be filed to the Registrar for the LLC formation process.
The registration statement can be filed electronically to the Registrar of Company. Or it can be physically delivered to the Registrar. In this way, the document needs to be signed by the one who is responsible for the filing process and be sent along with its duplicate.
When the filing of a registration statement is successfully completed, the company is deemed to be registered on the date of the filing; and a registration certificate will be issued after that. The registration certificate includes evidence of requirement compliance in respect of company registration.
3. Before incorporation: Matters to be considered
Taxation system of Cayman LLC is similar to Delaware LLC. The Islands is considered as the ideal place for offshore companies as there is no corporate income tax levied on the company’s profits.
The LLC enjoys pass-through tax treatment, so all profits and losses of the company will be reported as the personal income.
Besides, Cayman LLCs may apply for a tax undertaking certificate with the maximum period of 50 years. This means that it is not allowed to legislate to tax the relevant Cayman LLCs on profits, income, gains or appreciation within this period.
3.2 Limited Liability Company Agreement (LLC agreement)
An LLC agreement, also known as an operating agreement or LLC record, of Cayman Islands is an agreement finalized by all members of the LLC. It may be entered before, after or during the company registration process. If it is entered before the filing, it will be effective on the date of registration filing.
The agreement includes a set of rules regulating LLC business or affairs and internal business operations. The membership interests, or the ownership stake in other words, are clarified in the agreement. It determines who will be eligible to make future actions including amendment of LLC records, and vote on business matters.
Business decisions are made through written resolutions made by all the majority of members unless it is required to be made by all members in the LLC agreement.
An LLC agreement is not compulsory but advisable for all LLCs in the Islands. It is not required to be filed with the Registrar unless it is combined with a Registration statement.
Upon the company registration, a person is appointed to be the initial member of the company. All conditions and criteria of membership admission should be defined in the LLC agreement. A person can be admitted as a member if he or she meets all these requirements. A qualified member is also possible with the consent of all members in the company.
Another way to be a member of Cayman LLC is by receiving LLC interest from other company members under conditions specified by the company.
All members of the LLC are subject to terms defined in operating agreement, which includes the withdrawal of membership. The withdrawal of membership can be done also with the agreement of company members.
The management will be provided under LLC agreement or given to its members acting by a majority in number. The responsible management persons are required to comply with the obligations included in the agreement.
4. Some notes of post incorporation duties
4.1 Cash or property allocation
Profits and losses are distributed to members based on agreed value by all members or set out in LLC records. The amount of distributions are determined by their capital contributions.
One thing you should keep in mind is that the receiver will be liable for the company on the amount of distribution if he or she has actual knowledge of the company insolvency. When the company is not able to pay its debts, it is determined as insolvency status.
4.2 Register of members and managers
Register of members. It is compulsory for every Cayman LLC to maintain the Register of Members at the registered office or other places outside the Islands. If it is kept at a place other than the Cayman Islands, a record of the place’s address shall be maintained at the registered office of the company.
Register of managers. Like the register of members, the maintenance of the register of managers is also obligatory for the LLC. The register of mortgages and charges must be also maintained along with the record of the manager register.
A heavy penalty will be applied on cases which fail to comply with the requirements for the register of members and managers.
4.3 Books of Account & Records
Books of account. All Cayman Islands LLCs that are registered within the country must submit proper books of account recording all business transactions. Such books give an accurate and fair view of the business and LLC financial condition.
Records. The LLC is required to maintain records of the contributions given by its members and the company’s distributions to the members. The records shall specify the amount of the contributions and distributions including the date when all related activities take place.
All records shall be kept at the registered office of the LLC within the Islands. They can be kept in other places other than Islands, but their copies must be available at the registered office in electronic form or any other medium.
The records are maintained for the minimum of five years from the date of its preparation.
4.4 Annual Return
In January each year, all Cayman LLCs must file a return signed by or on behalf of the LLC. The signed document must state that the LLC complied with all provisions of the Cayman Islands LLC law during the calendar year with the completion of the annual fee payment to the Registrar.
5. Economic Substance (ES)
Cayman Islands has developed its legislation system to meet the Organization of Economic Co-operation and Development’s (OECD) principles and EU requirements for improving sufficient economic substance. The economic substance regulations are applied to all Cayman LLCs in connection with relevant activities in Cayman under ES law.
Economic substance refers to the legislation designed to determine whether a jurisdiction is abusive tax shelter – illegal tax optimization. The economic substance requirements are set for business entities to reduce harmful tax practice. It is required for a business entity to actually have substantial activities and carry out business activities rather than aim for tax purposes.
Business entities that fall under ES are required to do an Economic Substance Test with certain examination criteria. They must meet some requirements to satisfy the ES test, which includes:
- Conduct Core Income Generating Activities in Cayman;
- Be directed and managed in Cayman;
- Have adequacy of operating expenditure amount, physical presence, number of full-time employees in Cayman.
The Tax Information Authority monitors and enforces the compliance of the ES requirements in the Islands. The failure to comply with the requirements is subject to a penalty.
Explore Cayman Islands Economic Substance Requirements: The Ultimate Guide For 2021 to better understand what eligible entities under Cayman ES law should do to comply with the requirement.
The Cayman Islands has plenty of benefits that make it an ideal option for incorporation. Cayman LLC is simple to form, still it is important to understand its characteristics, legal requirements and general principles applicable to the registration and other related matters.
BBCIncorp is experienced in handling business registration in the Cayman Islands. Contact us for more information!