hedge fund structures

Typically, all types of structured entities provide a degree of liability, tax benefits, and control. 

Let’s first look at the most popular U.S. structures for managing a hedge fund: 

The Limited Liability Company (LLC) and the Limited Partnership (LP).

Both the LLC and the limited partnership have one thing in common: limited liability. Liability is of particular importance when the fund manager-member is directly involved with the day-to-day management of the company. 

With an LLC, liability can be increased or decreased by determining who is running the company. Investors are considered members of an LLC, while the investment manager outside the LLC is hired to manage it. Managers and members/managers take on the greatest liability since they are involved with the day-to-day management of the company.
 

In a limited partnership, the limited partners have minimal liability to the extent of their involvement in management. Limited partners are not supposed to be involved with management. It’s the general partner's responsibility to operate the partnership. Since the general partner is directly involved with managing the company partnership, the liability falls on him. 

When it comes to taxes, unlike a corporation, which pays its taxes on earned income, a limited partnership and an LLC both have pass-through income or loss features. Every partner or member receives a K-1 form from his respective general partner or manager stating the total earnings minus total expenses and the pro-rata share distribution or loss of the company. Each partner or member then reports his distribution or loss on Schedule E form in his yearly 1040 tax return.

Offshore Fund Structure (British Virgin Islands – BVI)

If the investors are coming from outside the US, it’s best to structure the fund in a tax-free offshore jurisdiction such as the British Virgin Islands or BVI. The majority of BVI funds are professional funds. To qualify as a professional fund, the shares may only be made available to investors who are “professional investors”, with the minimum initial investment by each such investor being no less than U.S. $100,000. The fund sponsors would also be required to have an administrator, auditor which is optional but highly recommended, a custodian bank, and two (2) directors minimum. 

Contact us to learn more about setting up your own hedge fund.