In Bermuda the law/rules governing the incorporation of a limited liability company can be found in the Companies Act 1981, as amended. For those of you who wish to have a look, the legislation can be easily accessed for free, online at www.bermudalaws.bm.

The most important thing to remember about a company is that it should be viewed as a separate legal person. That is, it has a distinct legal personality. Also important to remember is that companies are designed solely to make a profit for the benefit of their shareholders.

The purpose of the limited liability company is to limit the liability of its shareholders to the unpaid par value, if any, of their shares. It is important to remember that par value and market value are two different things.

The best way to describe how a limited liability company operates is to work through the incorporation process step by step from the idea to incorporate, through to obtaining the certificate of incorporation to the subsequent statutory meetings required to formalise the incorporation process.

There are two types of limited liability companies in Bermuda – local companies and exempted companies. Bermudians must be the beneficial owners of 60 percent, or more, of the shares in local companies, and the companies are subject to local taxes. Exempted companies are for the most part owned beneficially by non-Bermudians and are provided a tax exemption by the Minister of Finance valid until 2016.

Local and exempted companies are incorporated in a similar fashion. However, while a local company is free to trade in Bermuda, an exempted company cannot trade in Bermuda without a license from the Minister of Finance unless it is in furtherance of its business offshore or the business of another exempted company offshore.

A company is divided into two main branches, the investors (shareholders) and the board of directors. The directors are appointed by the shareholders to run the day-to-day affairs of the company. The directors are not required to seek the advice of the shareholders every time they make a decision, hence the reason why a board should be picked with great care.

Few documents are required to form a company. A company is formed when one or more persons subscribe their name to a Memorandum of Association, colloquially known as the Form 2, upon which the person or persons set out the extent to which liability is limited, the value of the shares and the objects for which the company is being formed. Prior to forming a local company the intention to do so must be advertised in the local newspaper.

There are no minimum share capital requirements for standard local and exempted companies. At Appleby, we tend to incorporate with $100 of paid up share capital at a par value of $1 per share.

Certain compliance issues must be addressed. All persons who hold a five percent or greater beneficial interest in the company must declare that interest to the Bermuda Monetary Authority (BMA). This is in the form of a completed compliance form, personal declaration, certified copy of passport and current utility bill. The last document to be completed, Form 1, outlines the beneficial ownership structure. The documents are then divided up, with the Form 1 and compliance form going to the BMA, and the Memorandum of Association going to the Registrar of Companies along with the requisite fees and cover letters. The cover letter to the BMA usually details the proposed ownership structure.

If the submitted forms have been completed correctly, and there are no compliance issues, the company is duly incorporated in a few days and the Registrar of Companies issues the certificate of incorporation.

Next, the provisional directors' meeting is held to assign the shares to the shareholders. Then the first annual general meeting of the shareholders is held, at which the first board is appointed.

After that, the first board meeting is held. Now the company is ready to conduct business, open bank accounts, enter into agreements and most importantly trade with limited liability.

In my next column, I will discuss the ways in which the affairs of a Bermuda company are wound up.

Attorney Simon Payne is a member of the Insurance Team within the Corporate and Commercial Practice Group at Appleby. A copy of Mr. Payne's column can be obtained on the Appleby 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.