Cayman fund structures: limited partnership vs. limited company
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Cayman fund structures: limited partnership vs. limited company
The Cayman Islands has become the most common domicile for most hedge funds these
days. The increase in legal entity options has made deciding on legal formation more
complicated than ever. The most common structure used to be a Cayman limited company
(Ltd). However, since the introduction of the exempted limited partnership (LP) in 2014,
we have seen increased use of the Cayman LP structure. There are a number of reasons
why new funds would consider launching a Cayman LP master fund rather than the more
traditional Cayman limited company structure. The chart below outlines some of the key
considerations and differences when deciding between a Cayman LP or a Cayman Ltd.
Cayman LP Cayman Ltd
Legislation Exempted Limited Partnership Law, 2014 Companies Law (2016 Revision)
Inception An LP requires at least one general partner There are no residency or
(GP) and at least one limited partner. The main qualification requirements for
requirement is that at least one GP is required directors or shareholders of a
to be either an individual resident in the company.
Cayman Islands, a company incorporated or
registered as a foreign company in the Cayman
Islands, an exempted LP in the Cayman Islands
or a registered foreign LP.
Amendment Provisions governing the amendment of Amendments to the memorandum
of a limited partnership agreement (LPA) or articles of association, or the
constitution are invariably contained in the LPA itself. name of the company, may only be
Notwithstanding any term in the LPA to made by special resolution of the
the contrary, any term of the LPA may be voting shareholders.
amended orally by the partners.
Liability An LP does not have separate legal A limited entity is a corporate body
personality, and a limited partner should not with separate legal personality. No
take part in the conduct of the business of the contribution shall be required from
partnership. A limited partner may lose the any member of the limited entity
benefit of limited liability if it engages in the exceeding the amount, if any,
conduct of the business of the partnership unpaid on the shares in respect of
with persons who are not partners in the which they are liable.
partnership who reasonably believed the
limited partner to be a GP.
Taxation An LP is by default a flow-through entity for Master funds formed as limited
for masters US tax purposes, and therefore, all profits and entities will need to make a “check
losses flow directly to the partners and the the box” election (i.e., Form 8832)
character of income earned by the partnership to be taxed as a partnership for US
is preserved. tax purposes. This election ensures
that the entity is treated as a
Although no entity classification election would
partnership for US tax purposes
be required in the US, it should be noted that
and that income flowing through to
even when the master entity is set up as a
the investors retains its character,
Cayman LP, if the GP in an LP feeder has no
i.e., dividends, short-term/long-
economic interest, then the IRS could take
term gains (losses). Given that
a position that the foreign master LP is not
there is no taxation on income,
technically a partnership. Many managers
profit or capital gains in the
setting up a Cayman master LP file protective
Cayman Islands, the limited entity
US check-the-box elections to treat the Cayman
can accumulate earnings without
LP as a partnership for US tax purposes to
taxation at the corporate level,
eliminate any tax risk on the issue.
while at the same time limiting
The Cayman LP structure may have tax benefits liabilities to the corporation.
for non-US investors whose home country
tax rules allow for treaty withholding rates in
foreign jurisdictions. Depending on the trading
strategy of the fund and the investor profile, the
LP structure may allow for reduced tax leakage
for those specific investors.
2
Cayman LP Cayman Ltd
Taxation Non-US investors, investing through a fiscally Cayman feeders that are organized
for feeders transparent structure, may be entitled to lower as limited entities are by default
withholding rates for income that the fund treated as corporations for US tax
earns when investing in other countries. The purposes. No entity classification
entire investment structures would need to be filings are required other than
transparent to the non-US investor; therefore, work filing on a protective basis.
investment through the offshore feeder would Investors from non-US jurisdictions
require both the offshore feeder fund and the would invest through a non-
trading master fund to be structured as Cayman transparent entity under their
LPs. The Cayman LP feeder would likely want local tax laws as well, so they are
to elect to be treated as a corporation for likely unable to claim home treaty
US tax purposes, allowing it to continue to benefits through this structure.
eliminate exposures to US trade or business The feeder would be a passive
and unrelated business taxable income, and foreign investment company to any
otherwise would function the same way a US taxable investors.
Cayman LTD would for US tax purposes. The
feeder would be a passive foreign investment
company to any US taxable investors.
Governance There is no legislation covering governance Similar to Cayman partnerships,
of Cayman partnerships; however, the there is no legislation covering
Cayman Islands Monetary Authority (CIMA) governance of Cayman limited
has published a Statement of Guidance for entities. However, the SOG referred
Regulated Funds – Corporate Governance to under Cayman partnerships also
(SOG) that sets forth the minimum guidance applies to Cayman limited entities.
for operators of Cayman Islands regulated
For directors of limited entities,
funds. Operators include the GPs of an LP.
under the Directors Registration
The SOG addresses oversight functions,
and Licensing Law, 2014, all
conflicts of interest, operator meetings, duties,
natural persons appointed as
documentation, relations with CIMA and risk
directors of regulated funds are
management.
required to be registered and pay
Under the SOG, the operator of a regulated an annual fee. CIMA may refuse to
fund has the ultimate responsibility for register an applicant under certain
effectively overseeing and supervising circumstances, and when that
the activities and affairs of the fund and occurs, the director can no longer
for ensuring that the fund conducts its serve as a director of the regulated
affairs in accordance with all applicable fund.
regulations, rules, laws, anti-money laundering
Professional directors are required
requirements, statements of principles and
to be licensed as professional
guidance. The operators of a regulated fund
directors under the law. CIMA may
should meet at least twice a year in person or
refuse to grant a license if it is
via telephone or video conference and, where
not satisfied that the director has
necessary, request the presence of the fund’s
sufficient capacity to carry out its
service providers at the meetings. They should
duties as a professional director and
also exercise independent judgment, acting
is not a fit and proper person for
in the best interests of the regulated fund and
licensing as a professional director.
taking into consideration the interests of the
There are further requirements for
investors as a whole.
professional directors to be insured
to minimum levels.
Accounting The accounting for an LP fund is considered Accounting for a limited entity
to be simpler than with a limited entity. There structure can be complicated.
are no shares to issue, no authorized capital Shares are required to be
to consider, no equalization and no series issued, and authorized capital,
roll-ups. equalization and series roll-ups are
all factors to consider.
Allocation of gains and losses to partners is
easier as the allocation is simply based on the Allocations of gains/losses are
dollar amount of the partner’s capital balance. performed based on the number
Allocations to/from the GP and limited partner of shares held by each investor.
(e.g., incentive allocations) are easier due to Shares will need to be issued and
not having to issue shares or redeem shares at redeemed if performance fees
the GP level when incentive is allocated. are allocated to the investment
manager as an investor in the fund.
3
Cayman LP Cayman Ltd
Financial Financial statements require a few less Financial statements require some
statements disclosures under US GAAP. There is no disclosures under US GAAP that
requirement to disclose a net asset value per an LP does not need to consider.
share roll in the financial highlights. All that is These include a net asset value per
required is total return percentage, expenses to share roll in the financial highlights,
average net asset ratio and investment gain/loss series roll-ups, share rollforward
to average net asset ratio. Financial statements disclosures and ending net asset
also do not need to take into account series roll- value per share disclosures.
ups, share roll forward disclosures or net asset
value per share disclosure.
Final thoughts
In June 2016, the Cayman Islands enacted the Limited Liability Companies Law,
2016 (the LLC law), which provides yet another kind of Cayman Islands vehicle: the
limited liability company (LLC). An LLC is a hybrid entity that essentially combines
characteristics of an exempted company with those of an exempted LP. Like an
exempted company, it is a corporate body with separate legal personality, but it does
not have share capital. The LLC is similar in many respects to a Delaware LLC but with
added amendments and modifications based on corresponding provisions from the
Companies Law and the Exempted Limited Partnership Law for greater consistency with
those laws.
Fund managers looking to launch new funds should consider the legal, operational and
tax aspects to the various forms when deciding which option is right for them. There is
no longer a one-size-fits-all approach to structuring.
Ernst & Young LLP key contacts
Jeff Short Seda Livian
Partner, Wealth and Asset Partner, Wealth and Asset
Management Assurance Management Tax
+1 345 814 9004 +1 212 773 1168
jeffrey.short@ky.ey.com seda.livian@ey.com
Rosa Nolan Bill Bailey
Senior Manager, Wealth and Asset Partner, Wealth and Asset
Management Assurance Management Tax
+1 345 814 9038 +1 441 294 5319
rosamond.nolan@ky.ey.com bill.bailey@bm.ey.com
4EY | Assurance | Tax | Transactions | Advisory
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