Rise of the LLCs
Mark Fleming, Director, Private Client
Mark Flemingasks whether the introduction of LLCs in offshore jurisdictions will prompt a shift in structuring outside the US
Limited Liability Corporations (LLCs) are particularly common in the US, where an estimated two-thirds of new businesses have an LLC within their structure in some shape or form. They may simply be used as group holding companies, as special-purpose vehicles for joint-venture arrangements or as part of a fund structure.
In an eﬀort to secure greater ﬂows of work from North America, both the Cayman Islands and Bermuda introduced legislation in respect of LLCs in 2016. More recently, Jersey has been working on the introduction of an LLC law, which is currently awaiting Royal Assent from the UK Privy Council.
To illustrate the thinking behind the introduction of the LLC law, in 2016, Jersey Finance noted that approximately half of all investors in Jersey funds were from outside Europe and, more significantly, around one-third of the total asset value was derived from North America. While these are fund-specific statistics, the broader structuring opportunities that an LLC can oﬀer private clients was certainly a consideration in the decision to go ahead with LLC laws.
FLEXIBLE CROSS-BORDER STRUCTURING
The introduction of LLCs by international financial centres (IFCs) gives US clients an option that is fully conversant from a cross border structuring perspective. They are ﬂexible entities with adjustable agreements to suit member requirements, and can regulate their aﬀairs privately. The latter may prove to be a big selling point, given the global privacy trend in recent years. However, it should be noted that the ultimate beneficial ownership details would
need to be held with the local authorities, and the LLC would be subject to the same anti-money laundering and Foreign Account Tax Compliance Act regulations as other entities.
When looking at the development of LLCs in the oﬀshore world, the big question is: will they generate traction in new work into these regions or just be a nice additional tool to have within the toolkit? The industry has gradually started to shrink, due to globalisation and the technological revolution. Given the shift, will there be other structuring options replicated in the oﬀshore jurisdictions from competitors, or will onshore locations see more activity?
‘Now more than ever, clients want no surprises, and are keen to be well educated and compliant’
Given the US’ current approach of looking inwardly, rather than to the wider world, it is too early to determine whether there is going to be a ﬂood of additional US investment into oﬀshore LLCs. One can certainly see ultra-high-networth individuals wanting to take a diﬀerent route and thereby explore other opportunities on an international basis. As a case in point, US clients may be keen to get exposure to financial markets from around the world; this can be done by utilising structures and employing service providers from a diﬀerent jurisdiction. These structures may involve a trust and, depending on the governing law, there is an ability to protect the assets settled into trusts. This will tend to be a tax-neutral play, given the need to report into the US, with the onus more on having an eﬀective way to pass wealth onto the next generation and diversify into other jurisdictions.
Now more than ever, clients want no surprises, and are keen to be well educated and compliant in what they do. As such, there is a prospect that US clients may well favour utilising a well-respected oﬀshore jurisdiction and entities that they are familiar with for their structuring.
CLIENTS LOOK TO OFFSHORE LLCs
At this stage, the signs for the oﬀshore jurisdictions with LLC legislation are positive. For oﬀshore locations geographically further away from the US, LLC legislation may well be of benefit as a counterweight to the time-zone issues that have been highlighted in the past. It will certainly be interesting to see how trends emerge on this and how it drives other areas and future growth.
While it seems likely that oﬀshore jurisdictions will look at further types of entities that can add to their respective lists, given the need to evolve, my expectation is that there will be constraints on how far this can go. The general
direction of travel is that the key types of entity should be present within the advisor’s toolkit, so that potential clients have the ability to choose. As an example, foundation laws have been introduced by key IFCs with a view to attracting more clients from civil-law jurisdictions. In addition, the consolidation of trust services providers will likely continue, resulting in such firms oﬀering these services, as well as other corporate and fund administration business lines, to clients from multiple jurisdictions. Such firms can already access a greater suite of entities and can readily adapt to client demands for an extended range of oﬀerings.
This will certainly be an area to watch in the coming years, and it will be very interesting to see how the trend evolves as other countries, such as China, continue to expand and rival the US.