In March, Jersey Finance technical manager, David Postlethwaite, spoke with BL Global about the introduction of a fund structure that will be familiar to US clients.
First, the obvious – what’s an LLC?
An LLC is a business structure that’s very popular globally, especially in the US, where it currently accounts for over two-thirds of all new transparent business structures formed in the country each year.
An LLC combines the flexibility and privacy of a partnership with the protective limited liability of a company. As a result, it has a wide variety of uses worldwide – from SMEs and holding companies to fund structuring.
Why is Jersey thinking of introducing them? Aren’t there sufficient structures already?
In the US, LLCs are a structure of choice for alternative investment funds. US advisers and managers are familiar with LLC structures and can benefit from tax transparency for US tax purposes.
Introducing the LLC into Jersey law should only strengthen the island’s position as a leading international finance centre and attract more business from US-based institutions and funds by providing a familiar vehicle.
What stage are we at now?
The Government of Jersey launched a consultation on the draft Jersey LLC law, which closed on 12 January 2018. As part of the consultation process, Jersey Finance worked closely with its members to garner their responses. Those responses will now be analysed, and a revised draft of the law will be prepared.
Jersey already has LLPs, so why would they want LLCs?
Historically, entities introduced into Jersey law tended to mirror equivalent UK structures, essentially to meet the needs of the UK or European market. The introduction of a Jersey LLC (JLLC) intends to primarily service the US market.
The JLLC resembles the Jersey LLP – both can hold assets in their own name, have limited liability but can achieve tax transparency. But the proposed JLLC also offers additional flexibility over an LLP.
In fact, there may be many good reasons to choose a JLLC over an LLP, including the ability to create ‘series’ – akin to cells in a cell company – which may contract and hold assets individually.
While the Jersey LLP is likely to remain the transparent vehicle of choice for direct investment into the UK for the US market (where LLCs aren’t readily recognised as tax transparent), it’s clear that there is a place for the new JLLC.
What type of firms are most likely to use or set up as LLCs? Indeed, for what purpose are they most likely to be used?
What sets us apart from other IFCs is that the JLLC would provide a forward-thinking proposition for US-based institutions and fund managers, particularly for hedge fund structures.
The most obvious use for the JLLC would be as Jersey master and feeder funds in a typical US-style master-feeder structure. A master-feeder fund is a common structure that hedge funds use to pool taxable and tax-exempt capital raised by US and overseas investors into a centralised vehicle known as a master fund. Separate investment vehicles – otherwise known as feeders – are established for each group of investors.
Having a JLLC would allow for legal and structural consistency with any US entities within the structure.
JLLCs may also be attractive to future investors looking for a more flexible alternative to a Jersey limited company.
What are the benefits of JLLCs?
Although the law is still in draft form, JLLCs are expected to offer many benefits:
• Familiarity to US clientele, with a close match to the equivalent US legal framework
• Simplified fund management for US managers through consistency with US fund concepts
• Unlike an LLP, a JLLC may be formed by a single member
• The JLLC would be governed by a private LLC agreement, which can be extensively tailored to member requirements
• Flexible corporate governance, with the ability to appoint a manager who isn’t a member of the JLLC
• Potential for tax transparency, with a check-the-box facility to elect to be treated as a company for Jersey tax purposes
• Ability to create series, akin to cells in a protected cell company.
Are there any downsides?
Whilst the flexibility of the LLC would be great for UK investment, the UK hasn’t automatically recognised LLCs as tax-transparent. Although JLLCs are not aimed at the UK market for that reason, there are indications in recent UK case law that this position may change.
Jersey Finance is working with industry and the Government of Jersey to ensure that the JLLC is best placed to take advantage of this shift and to ensure that JLLCs are widely accepted as tax-transparent.
Will JLLCs be regulated?
It’s intended that formation of a JLLC would be by registration with the Jersey Financial Services Commission. In line with other Jersey entities, JLLCs are expected to require a Jersey-regulated service provider. That service provider would be required to apply the usual standards, including the Anti Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regime.
JLLCs would be expected to comply with all current disclosure requirements in relation to beneficial ownership and controllers. The raising of capital by an LLC would also require consent from the JFSC under the Control of Borrowing (Jersey) Order, 1958.
When will they come into force?
The next step is for a revised draft of the JLLC law to go through a scrutiny process before being tabled for debate in the Jersey legislature later this year.
This article is also available on the BL Global site.