An LLC may be the right entity for you
First published in The Royal Gazette, Legally Speaking, June 2022
Every day, we see clients choosing to incorporate a company limited by shares, often just referred to as a company.
A Bermuda company is a well-established choice for those looking to form businesses, both local and international, and is well understood by investors.
However, a company is, now more than ever, not the only choice.
Today I will focus on those individuals who are interested in owning and operating their own business.
You can do so as a sole trader or as a general partnership; however, doing so leaves you personally liable on a dollar-for-dollar basis for the debts and obligations of the business.
A common way to address this issue is to form a vehicle treated as a separate legal person.
In the past, the default option was a company, which requires at least one shareholder and a separate distinct board.
This arguably creates undue complexity where one has a person or persons that are both owner and operator of a business.
Today there is an alternative: the limited liability company (LLC).
An LLC is a hybrid vehicle that combines the characteristics of a Bermuda company limited by shares and those of a Bermuda partnership.
LLCs are often favoured by small, owner-managed businesses that want flexibility without a lot of corporate formality.
Bermuda’s LLC is very similar to that which is widely used in Delaware. Our LLC legislation reflects the principal features of the Delaware LLC with amendments and modifications to reflect Bermuda law and concepts.
Like a Bermuda company, an LLC has a separate legal identity. Those who do business with a limited liability company must look to the entity itself to satisfy any obligations owed to them, and not to the LLC’s members or managers.
Another positive of a Bermuda LLC is that unless the LLC agreement — essentially its constitution and otherwise known as its operating agreement — specifies differently (and unlike a partnership), an LLC has perpetual existence.
This means that the owners can change without triggering the dissolution of the LLC. A member’s death, retirement or withdrawal from the LLC for any other reason does not mean that the LLC ceases to operate.
This is a benefit shared with a traditional company and of course is useful for those wanting to ensure that the vehicle can form part of any succession planning.
While the LLC therefore retains a number of the benefits of the traditional company, it also offers benefits that are more closely associated with a partnership, chief among them being flexibility.
The LLC agreement governs the internal organisation, management arrangement and administration of the LLC.
There is greater flexibility, in line with the principle of contractual freedom, for members to agree among themselves how to arrange the business affairs of the LLC.
Members can, for example, agree on the appointment and removal of managers, voting and consent rights, duties of the LLC and other applicable parties, and the allocation of profits, losses and distributions.
Additionally, the process for amending the LLC agreement may be agreed among members in the agreement itself.
Exploring options for the management structure provides further illustration of the flexibility available to an owner/operator of an LLC.
Ultimate control over the LLC’s business rests with its members by the way in which they draw up the LLC agreement.
However, the LLC through that agreement can provide that day-to-day affairs or other management decisions will be controlled by one or more managers.
Managers can be members or non-members and their role can be expanded or restricted based upon what is provided for in the LLC agreement. A manager or managing member may also benefit from limited liability despite their active role in managing the LLC.
This flexibility means that the LLC can be structured to accommodate a whole range of scenarios, whether that be a sole trader owner/operator or a traditional partnership-type approach — and a variety of other options in between.
Of course, as the business grows or circumstances change, so too can the governance arrangements of the LLC by simply amending the terms of the LLC agreement.
An LLC is largely able to operate on a day-to-day basis in the same way as a company, giving owners/managers comfort that they can properly conduct their business activities.
For example, an LLC can enter into agreements in its own right, (eg, leases) and can hire and manage employees and contractors.
Further, an LLC is able to enter into financing arrangements with banking institutions and can provide collateral in order to secure those arrangements.
As this column illustrates, should you have a business idea that you wish to bring to fruition, an LLC may be the right business entity for you.
