As the world’s largest economy, it’s no surprise that many funds launch in the US each year. Delaware leads the pack as domicile location of choice in the US, and there are clear factors in its favour. Seen as an easy place to set up, with a solid infrastructure and attractive tax requirements.
Regulated by the US Securities and Exchange Commission (SEC), it provides comfort by offering protection to investors, adding to its appeal as a safe and beneficial domicile. The Court of Chancery, Delaware’s court system, has extensive precedents and case laws for civil cases from over 200 years in operation, providing a sound structure for resolving disputes should they occur.
Delaware does not tax sales, interest, property or investment income, but it does require an annual franchise and LLC tax.
Explore Fund Structures: Limited Partnership | Limited Liability Corporation | Non-publicly Traded Corporation
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Limited Partnership
Fund vehicle description
A limited partnership is formed by GPs and LPs entering into a Limited Partnership Agreement (LPA). This partnership consists of one or more persons who are the general partners and one or more persons who are the limited partners. With most limited partnerships, there is one general partner who has unlimited liability and will have full control of the limited partnership. One or more limited partners typically have liability limited to their investment amount and no involvement in management.
Key considerations
The advantages of a limited partnership include:
• Fast incorporation. The less formal structure does not require any annual meeting
• Benefits for limited partners. Under this structure, limited partners are protected against personal liability. The limited partners receive a Schedule K-1 form that will be used to report their portion of the limited partnership’s income or loss on their personal tax return. Limited partners are not subject to self-employment taxes.
• Beneficial tax framework. The limited partnership is a pass-through entity for taxation purposes, filing a Form 1065.
Tax implications
When establishing a limited partnership in the United States, it’s important to understand the tax implications.
• Limited partnerships are not subject to any income or corporate tax. Limited partnerships typically do not pay taxes at the business entity level.
• All profits and losses flow directly to the individual limited partners.
• The limited partnership will distribute income to the limited partners, which may be taxed as ordinary income or capital gains. If this distribution classifies as a return of invested capital, it may not be taxed at all.
Limited Liability Corporation
Fund vehicle description
A limited liability corporation is formed by one or more members in accordance with the terms of the limited liability company (LLC) agreement. One or more members manage the affairs of the LLC or elect a management group to do so.
Key considerations
The advantages of a limited liability corporation include:
• Limited liability. Member(s) are shielded from personal liability for acts of the LLC and its other members.
• Flexible membership. Member(s) can be individuals, partnership, trusts, or corporations. There is no limit on the number of members.
• Taxation benefits. LLCs benefit from pass-through taxation, so they are not required to pay taxes at the entity level.
• Limited compliance requirements. LLCs face fewer state-imposed compliance requirements.
Tax implications
When establishing an LLC in the United States, it’s important to understand the tax implications.
• LLCs are not subject to any income or corporate tax.
• Pass-through taxation is applied to LLCs, so taxes do not need to be at the business entity level.
• All business income or loss is passed through to the LLC members and reported on their personal income tax returns.
Non-publicly Traded Corporation
Fund vehicle description
A non-publicly traded corporation is a legal entity that is separate and distinct from its members.
Key considerations
The advantages of a non-publicly traded corporation include:
• Fewer reporting requirements. Non-publicly traded corporations do not have as many reporting obligations as other entities.
• Increased privacy. Non-publicly traded corporations are not typically required to publish their financial statements.
Tax implications
When establishing a non-publicly traded corporation in the United States, it’s important to understand the tax implications.
• These corporations are fully subject to taxation.
• Non-publicly traded corporations pay taxes on the business profits at both corporate and personal levels.
• Double taxation may apply.
