With Limited Liability Partnerships now available in Guernsey, David Crosland and Jonathan Cheney examine the new law and consider the potential uses for the new structure.
At midnight on 13 May 2014, the Limited Liability Partnerships (Guernsey) Law, 2013 came into force allowing LLPs to be incorporated in Guernsey for the first time. A number of these new vehicles already appear at the Guernsey Registry.
Since their introduction in certain US states in the early 1990s, LLPs have been introduced by a number of jurisdictions including India and Japan as well as 40 states in the US and the UK. To date the only international finance centres (IFCs) to have adopted the structure are Singapore, Dubai and Jersey. None of the Caribbean jurisdictions have yet launched their own offering.
Despite having a common name the nature and characteristics of LLPs vary globally. By waiting until the concept gained global recognition before introducing its own LLP legislation, Guernsey has been able to assess the effectiveness of these varied forms and design a flexible LLP suitable for use in the broadest range of business applications.
The introduction of LLPs was first approved by the States of Guernsey in 2009 and the new law was subject to extensive research, consultation and amendment before coming into force this year.
Guernsey's LLP legislation has been based upon the UK's Limited Liability Partnerships Act, 2000, with certain key differences designed to improve upon this well-proven formula. Accordingly, Guernsey LLPs are bodies corporate with separate personality from that of their members. They have the ability to own their own assets and to sue and be sued in their own name. Guernsey LLPs also have unlimited capacity and may do anything that a legal person can do.
A Guernsey LLP must have two members but the UK concept of ‘designated members’, with particular compliance responsibilities, has not been carried across. Accordingly, the members have complete flexibility to determine the ownership, operation and management of their LLP.
Notwithstanding their separate legal personality, Guernsey LLPs will be taxed in the same manner as any other partnership or limited partnership for Guernsey tax purposes; they will be tax transparent. The LLP itself will therefore not be subject to tax itself but rather the members will be liable for their share of the profits and gains of the LLP. It is also worth noting that, despite its proximity to the UK, both legally and geographically the Guernsey LLP will not be subject to HMRC's recent changes to the taxation of members of LLPs in the UK.
Guernsey LLPs diverge from the UK in two further areas. Unlike the UK, all Guernsey LLPs are required by law to have a written LLP agreement between the members and the LLP itself, which governs the affairs of the LLP and the conduct of its business. This agreement is private and is not publicly-filed. Similarly, Guernsey LLPs are not required by law to prepare annual accounts nor to file such accounts with the registry – an important feature where confidentiality is valued. As a result the financial position of the LLP, the value of its assets and the respective shares of its members can remain private. If accounts are required by the members they are free to choose the applicable accounting standards (LLPA GAAP) and are not tied to UK GAAP or IFRS in the same way as UK LLPs.
Liability of Members
A key attraction of LLPs globally is the limited liability afforded to their members. A Guernsey LLP is no different in this respect and in the ordinary course of business a member will not be liable for any debt of the LLP or the debts of any other member. Unless otherwise provided by the LLP agreement, members also have no default liability to contribute towards the capital of the LLP.
Unlike in a limited partnership structure, where limited partners are restricted from taking part in the management of the partnership, the members of an LLP may take a full and active part in management without losing their limited liability status. As a result, Guernsey LLPs are likely to prove popular for professional services firms (their traditional target market) but also joint ventures and other investment ‘club’ arrangements where joint management is desired. Such flexibility also allows for the creation of more extensive minority rights than may otherwise be available in a corporate or limited partnership structure.
Every member of a Guernsey LLP is an agent of the LLP but not of the other members. As a result, there is no joint and several liability between members but members may be personally liable for their own negligence if they have assumed a personal duty of care towards a third party and have acted in breach of that duty. In keeping with the UK position there are no bond or minimum professional indemnity insurance requirements for Guernsey LLPs (unless otherwise imposed by the rules of any professional or regulatory body).
In both the UK and Guernsey, the laws provide for statutory protection for minority shareholders of companies where it can be shown that the company is being managed in a manner unfairly prejudicial to the interests of that shareholder. This basic statutory right has been carried across to the LLPs in both jurisdictions. Guernsey has gone further by also expressly providing that any member may bring a derivative claim for, and on behalf of, the LLP. In each case, and in keeping with the notion that the members of the LLP should have the ultimate say in how the LLP is to be run, these protections may be waived by unanimous agreement of the members.
Guernsey's modern, electronic registry system allows new LLPs to be formed on a same-day basis through the filing of a basic incorporation statement and payment of the requisite fee. Guernsey's LLP Law also provides for the conversion of existing general partnerships to LLP status in the same manner as the UK. Where Guernsey has gone further is in adding the ability to migrate LLPs into and out of Guernsey in accordance with the procedures laid out in the LLP Law. Such migrations will preserve the existing legal entity of the LLP (together with its assets and liabilities) and merely transfer it into or out of the jurisdiction of Guernsey law.
The breadth of potential uses for these new Guernsey LLPs has become evident in the very short period of time following the enactment of the new law. Already LLPs have been registered to house investment management firms, aircraft ownership and management operations and simple asset holding structures – a testament to the flexibility of the structure.
In some other jurisdictions the use of LLPs is restricted to the provision of legal, accountancy or other knowledge-based professional services. The UK is less restrictive where LLPs may be formed for any lawful business with a view to profit. Guernsey LLPs are not targeted at a particular industry or business and may be formed for any lawful business with a view to profit, or any other lawful activity. This latter limb was added to avoid the uncertainty present in UK law as to whether LLPs, which could not perhaps be said to be carrying on a trade or business (for example acting as a holding entity), have been validly incorporated. The Guernsey LLP could also be used by charitable bodies, which are prevented from being structured as a UK LLP. It is therefore hoped that Guernsey LLPs will find a much broader range of uses than has historically been the case for LLPs elsewhere.
Of course one of the key advantages of LLPs over a limited partnership structure is the ability of members to take a full part in the management of the LLP. In certain investment funds or clubs structured as limited partnerships there can be tension between an investor's desire for limited liability and his desire to take an active role in the management of the fund or its underlying assets (therefore undermining the very limited liability he holds so dear). In the LLP context this uncertainty is removed and it is anticipated that they will prove popular for real estate investments in particular, where commercial properties and developments are often required by small numbers of investors in club or joint venture arrangements with each maintaining an active role in the management of the assets.
With a thriving investment funds industry it is likely that Guernsey LLPs will become well used as investment and asset management vehicles - a trend certainly seen within the UK. Following the imposition of the EU Alternative Investment Fund Managers Directive (AIFMD), and the desire of many of those caught within its scope to restructure their operations to avoid the worst impacts of the directive, the ability to migrate existing LLPs into the island (and outside of AIFMD) may well prove attractive to a number of these onshore managers.
Recent changes to accounting regulations in the UK mean that many investment funds structured as English or Scottish limited partnerships (common in the private funds arena) will have to (a) prepare annual accounts in accordance with UK GAAP or IFRS and (b) publicly file those accounts. However, limited partnerships, that have an LLP as their general partner, will not be subject to these requirements and will continue to be able to prepare accounts in accordance with the limited partnership agreement. Guernsey LLPs will therefore provide a convenient structuring solution for investment managers wishing to maintain utmost flexibility and confidentiality.
What is less clear (ironically given the manner in which LLPs first came about) is whether Guernsey LLPs will be adopted by local professional firms and other trading businesses. With its low, flat tax rates the attractions of tax transparency for Guernsey resident members of an LLP are less apparent. It is perhaps here that the use of LLPs between Guernsey and the UK will diverge with Guernsey's LLPs proving more popular as another special purpose vehicle in the island's already flexible armoury.
By holding back and assessing the international landscape and by building on the work of the UK, Guernsey has been able to add a robust, flexible, internationally recognised LLP to its already extensive offering of corporate vehicles. For that it owes a debt of gratitude to its near neighbour.
David Crosland, Partner, Carey Olsen and Jonathan Cheney, Partner, Addleshaw Goddard