How to Start a Hedge Fund in Delaware

Updated on Monday 04th February 2019

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American hedge funds are typically registered in Delaware, a jurisdiction which offers numerous tax advantages for the investors who are interested in how to start a fund. A hedge fund registered in Delaware, United States of America (USA) generally refers to private investment companies which can benefit from specific incorporation exemptions applicable under the Securities Act 1933 and the Investment Company Act 1940

How to register a Delaware hedge fund 

Investors who are interested in incorporating a hedge fund startup in Delaware will need to register two legal entities. One of the business forms refers to the hedge fund itself, while the other one is created for the investment manager of the hedge fund. Delaware is the main location in USA where hedge fund startups can be registered, as the jurisdiction offers a legislation favorable to the business environment. 
As a general rule, the hedge funds in Delaware, USA are registered under one of the following business forms: the limited partnership or the limited liability corporation (LLC). When incorporating a hedge fund in Delaware, the investors will need to register the legal entity with the Internal Revenue Service (IRS).

At the same time, it is necessary to apply for a Federal Employer Identification Number, a procedure which can be completed on the IRS’ website. It is important to know that the registration procedure can be completed in a short period of time. The procedure on how to start an investment fund in Delaware registered as a hedge fund states that the investors will need to draw the company’s articles of association and other compulsory documents. 

Why start a Delaware hedge fund through a LLC? 

As mentioned above, a hedge fund startup in Delaware can be set up as a partnership or as a LLC. Although the latter represents a newer business structure in Delaware (introduced in 1991), this legal entity became very popular amongst the investors wishing to start a commercial business, but also for those interested in opening an investment fund

The LLC became an attractive business structure due to a set of reasons which refer to the liability of the investors, as well as to the freedoms they can assume within the fund. When opening a hedge fund startup in Delaware through a LLC, the company’s founders will have the quality of members. The members of the company are also its owners, but the advantage is that they will not be held liable with their personal assets for the debts of their company. 

When registering a LLC in Delaware, the company is formed through a operating agreement, a founding document which provides a great flexibility to its members. This refers to the liberties they have in terms of the structure of the company’s management. Through this structure, the managers of the hedge fund startup will also benefit from more advantageous conditions. 

Qualifying a hedge fund in Delaware 

Another option related to the incorporation of a hedge fund in Delaware refers to qualifying the respective investment company in this jurisdiction. This option is available for a hedge fund that has already been incorporated in another state and the investors are interested in performing investment activities in Delaware

Foreign funds qualifying in this situation will only refer to the registration with the competent authorities, which will issue a certificate that will state the investment fund has the right of performing investments in Delaware. At the same time, the certification will also refer to the fact that the fund is registered for tax purposes in this jurisdiction. 

What is the procedure for qualifying a hedge fund on foreign markets? 

The procedure on how to start an investment fund in Delaware which develops investment activities on foreign markets is known as foreign qualifying. This is applicable when the hedge fund is registered in Delaware, but the fund’s manager develops his or her activities in a foreign country. Simply put to words, the procedure refers to the registration of the Delaware hedge fund in the jurisdiction where the manager is a resident. 

In this case, the foreign manager is legally required to obtain a certification which will allow him or her to carry out the business activities developed through the Delaware fund in another country. Once the fund was registered in both jurisdictions, it is necessary to know that it will be liable to taxation in both states, following the legislation on the matter applicable in each jurisdiction where the fund operates.

Also, the fund will need to follow the reporting requirements that are imposed in each state and pay the necessary fees requested by each local institution. According to the legislation in Delaware, the fund might need to be registered for foreign qualifying if it has employees or owners residing in other states, which means that the entity should be registered in more than one foreign country. 

It is necessary to mention that the procedure of foreign qualifying does not impose high fees, and it is a required procedure for funds that are created to develop investment activities in other countries. Provided that the fund’s representatives fail to obtain their certification, a set of punitive measures can be imposed. 

For example, the fund can lose the right of bringing a claim in front of a court, but it is necessary to know that in this situation, the vehicle can regain this right, after concluding the certification procedure, even at a delayed period of time. It is advisable to obtain the certification in due time, as the investment fund can be imposed with a set of fines and additional taxes.  

Why open an investment fund in Delaware? 

There are a set of solid reasons for investing in Delaware. One of the main reasons is that the state benefits from a court which handles cases deriving from corporate legislation in a fast manner; this is completed through the Court of Chancery. It is necessary to know that Delaware benefits from a legislation in the business field that has been constantly adapted to the needs of the market for more than 100 years. Other reasons for investing in this region are presented below: 
  • Delaware does not apply a set of taxes, such as the income tax, the sales tax or the property tax;
  • when starting an investment fund in Delaware through a LLC, it is necessary to know that the founders benefit from a high level of privacy, as the data on the wealth of the investors is very well secured here; 
  • however, information concerning the wealth of a person or of a legal entity (or investment fund) has to be known in accurate details by the country’s financial and tax institutions;
  • it is allowed to start a LLC as a single investor, regardless of the nationality of the person;
  • businessmen wishing to start a hedge fund startup in Delaware through a LLC benefit from very low incorporation costs, as the registration of a LLC, the top preference when investing here, costs approximately $250; 
  • also, this business form does not require any minimum share capital during its incorporation.  

Investors interested in how to start a fund in Delaware should know that the company’s employees will also need to be registered for taxation in this country. Businessmen are invited to contact our team of affiliates in Delaware for more details on the registration of a hedge fund. Those interested in how to start a hedge fund in Delaware can receive in-depth assistance on the taxation of this type of investment company.