Nearly a decade after they were first introduced in Bermuda, parties have started to appreciate the benefits offered by limited liability companies — and consequently we have begun to see LLCs used with increasing frequency.

The LLC first became available in Bermuda on October 1, 2016, with the passing of the Limited Liability Company Act. This legislation introduced a vehicle to the island that is very similar to the widely used Delaware LLC.

Although the “C” in LLC stands for “Company”, an LLC arguably provides a much greater level of flexibility with respect to its governance than does a traditional company. As such, it is more akin to a limited partnership with the relationship between the LLC and its members governed principally by the LLC Agreement.

One key factor that may drive someone towards a traditional company, even absent the same flexibility, is the limited liability of its shareholders.

While this issue is somewhat addressed by the use of a limited partnership, where the liability of its partners is limited, this is provided that they do not participate in the management of the partnership. This may be unappealing, particularly where those partners have invested significant amounts of capital into a structure.

The LLC represents a hybrid solution, providing flexibility in terms of governance while preserving limited liability even where members participate in the management of the vehicle.

Initially, the uptake for LLCs in Bermuda was perhaps best described as a slow burn. This is not a surprise as there is often a hesitation to be seen as “first” or doing something that breaks an established mould which may then need to be explained to advisers, investors or other interested parties.

Today, however, they are very much an option for those setting up an entity on the island.

Previously, a group of investors looking to create a new holding entity for the pooling of investments to fund the establishment of a new platform — or the acquisition of an existing target — would often turn to a company or limited partnership.

Structures using a company often found, and still find, themselves subject to two documents: the bye-laws of the company, which set out the rights attaching to its shares, and a shareholders’ agreement where the shareholders agree how they may exercise those rights. These governance arrangements are subject to and limited by applicable statutory and common law.

Alternatively, limited partnerships have been used in similar structures to provide the flexibility sought. However, the more these arrangements stray into the ability to participate in the management of the partnership, the greater the risk of losing the limited liability that investors value so much.

As such, we have seen the LLC being introduced to provide the flexibility sought without compromising the limited liability position of participants. Indeed, the legislation expressly states that the intention of the statute is to give “maximum effect to the principle of freedom of contract”.

In a similar vein, we have seen LLCs being used as vehicles for joint venture structures where two or more parties wish to establish a collaboration without being constrained by the company legislation or an inability to participate in the management of the business.

Indeed, it is often the skills and knowledge that one or more parties would bring to the management of the enterprise that is the basis of their part in the collaboration.

Another interesting use case has been to provide consistency across jurisdictions where multinational groups operate.

As the Bermuda LLC is largely derived from the Delaware LLC, virtually the same result can be, and has been, achieved across the jurisdictions. This can be particularly helpful in the context of a fund where investors may hold interests in either a Delaware or Bermuda entity but, in so far as possible, the terms upon which each invests should be the same.

Going forward, we would like to see more use in a local context. This is particularly the case where local businesses can streamline efficiencies between shareholders and directors by having a single level of governance.

Provided that matters of governance and other regulatory issues can be adequately addressed, we also see scope for the LLC to be used more in regulated sectors in the jurisdiction — particularly if that provides a solution that does not exist in other international financial centres.

• Matthew Ebbs-Brewer is a partner in Appleby’s corporate practice in Bermuda. A copy of this column can be obtained on the firm’s website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer