The Limited Liability Companies (LLC) law is expected to come into force early this year and is designed to allow fund managers and investors to use a LLC structure with which they will be familiar from the US and certain other international finance centres. Here, Appleby offers an overview of the legislation.
LLCs are a flexible structure. They are widely used in the US across a range of areas, including holding companies and fund structures – and this is what they will most likely be used for in Jersey. It is estimated that over two thirds of all newly established entities in the US are LLCs.
The Jersey Financial Services Commission (JFSC) will issue a certificate of formation for LLCs in Jersey and will regulate them. Given the popularity of LLCs as fund and fund management vehicles it is expected that JFSC guidance and Codes of Practice will also be updated to allow LLCs to be used for collective investment funds and for funds services business.
Key features of LLCs
• They will have legal personality (can sue and be sued and own assets in their own name) but will not be a body corporate.
• They benefit from limited liability.
• They must have at least one member and can have managers.
• The key governing/constitutional document of the LLC is the LLC agreement. In keeping with other jurisdictions, the LLC agreement will not be a matter of public record, so members (and managers) can regulate their affairs privately. This distinguishes LLCs from traditional limited companies where memoranda and articles of association are publically available and is more akin to limited partnerships whose partnership agreements do not need to be filed.
• The terms of the LLC agreement will determine how the LLC is operated. The member or members may operate the LLC themselves or can appoint one or more managers (who will act in a manner broadly equivalent to directors of a traditional limited company) to undertake the operation and management of the LLC.
• A Jersey resident secretary will be appointed (typically a Jersey-based corporate services provider), who will be responsible for record-keeping and will usually also provide the registered office for the LLC.
• It will be possible to create separate series consisting of separate members, managers, interests or assets, each of which will have separate legal personality. These series LLCs are typically used for fund or structured finance transactions and are similar in concept to cell companies. Series are usually used to ringfence assets and liabilities for a specific fund or deal and are common in the US.
In addition to the LLC law, there will be ancillary laws and regulations passed but, in keeping with Jersey’s reputation as a well-regulated and transparent international finance centre, it is anticipated that LLCs will be subject to the strict anti-money laundering and 'know your client' regime that exists here.
LLCs will need to comply with the requirement to disclose ultimate beneficial owners to the JFSC. They will also likely be subject to the recently enacted substance requirements that have been introduced by Jersey in consultation with the European Union as part of the OECD’s 'base erosion and profit shifting' international initiative.
Finally, LLCs will also be subject to the tax information exchange arrangements into which Jersey has entered, based on the OECD model.
The tax treatment of LLCs in the US depends on the 'check-the-box' election and is designed for maximum flexibility. Jersey LLCs should be treated in the same way as any other non-US LLC and able to make appropriate elections depending on underlying tax analysis and advice.
While initially a product designed primarily with the US market in mind there is a possibility that other jurisdictions will be attracted to the LLC as a structure or that fund managers from outside the US will use Jersey LLCs to attract US investors.
Summary
The LLC law will allow US investors, fund managers and other businesses to set up a familiar structure in Jersey, which should increase the jurisdiction’s appeal to the US market. Jersey Finance has announced its intention to open an office in the US and the introduction of the LLC Law should enhance structuring options for US investors who are attracted to Jersey as a finance centre.