US Hedge Fund Formation
Hedge funds and other alternative investment funds were developed on the basis of exceptions from the securities legislation enacted in the U.S. in the 1940s to regulate collective investment undertakings. The purpose of the exceptions was to exclude “private investment companies” and personal and family holding companies from the scope of legislation. However, the SEC “knowingly permitted any group of up to 100 people to create a private investment pool”.
A hedge fund is usually structured as a limited partnership or limited liability company to give the general partner (the fund manager) a share of the profits earned on the limited partners or members (the investors) money. The profit sharing (referred to as a “performance fee” or an “incentive allocation” if referring to an onshore fund) is typically 20 to 30 percent of the fund’s profits. Management fees are typically 1 to 2 percent of assets under management and are paid to support the cost of day-to-day fund operations.
In Delaware there are a number of advantages to establishing an investment fund, these include:
- Favourable regulatory regime for hedge funds
- Clear and neutral tax domicile
- Favourable implication for the contractual structure, fund performance, risk-taking behavior
- More common understanding about the structure and governance under Delaware law
- Relatively low start-up and on-going fees and costs
US Fund Structures
- US Hedge Fund
- US Forex Fund
- Private Equity Fund
State of Delaware
More than 60% of Fortune 500 companies form in Delaware and the numbers continue to grow.
Delaware is the first choice for business owners seeking: Asset protection, a pro-business environment, and the prestige that accompanies Delaware LLCs and Delaware incorporation
By incorporating in Delaware, a compelling array of additional benefits are available, such as:
The Delaware PRIVACY Advantage:
- Company ownership need not be disclosed to the State of Delaware.
- Company ownership transfers need not be reported to the State of Delaware.
- Delaware does not maintain a publicly available database of companies’ management.
- The reporting and disclosure obligations imposed by the State of Delaware are minimal.
The Delaware ASSET PROTECTION Advantage:
- Owners of Delaware LLCs and corporations receive limited liability protection.
- Owners’ assets cannot be seized as a result of the LLC or corporate liabilities.
- Due to the privacy protection offered by Delaware, it is more difficult for attorneys to track business owners and owners’ assets.
The Delaware TAXATION Advantage:
- Delaware imposes no income tax on either LLCs or S corporations.
- Delaware imposes income tax on C corporations only to the extent that income is earned in the State of Delaware.
- Delaware imposes a low franchise tax for small companies.
- Delaware imposes no tax on capital stock or assets.
- There is no sales tax in Delaware.
- There are no Delaware capital shares or stock transfer taxes.
- There is no state inheritance tax on stock held by nonresidents of Delaware.
The Delaware CONVENIENCE & FLEXIBILITY Advantage:
- Delaware is one of the least expensive states in which to form an LLC or corporation.
- Delaware allows one individual to act as the shareholder, director, and hold all the executive offices.
- Delaware LLCs and corporations can be headquartered anywhere in the world.
- Aside from a registered agent address, owners are not required to maintain a physical address within the state.
- Company records do not need to be physically located in the State of Delaware.
- Stock can be transferred instantly and privately, without filing a public notice.
- You do not have to be a US citizen to form a regular Delaware C corporation or LLC.
- Delaware does not impose a minimum capital investment requirement for LLCs and corporations.
- Delaware LLCs and corporations offer generous protection (sometimes called indemnity) from personal liability.
- Unlike most other states, Delaware corporations can easily be converted into LLCs and vice versa.