Structure of Investment Funds

Shareholder dividends are taxed, although the corporation's earnings were already taxed.

In the U.S. especially, the "limited partnership" (LP) is one of the dominant legal structures used by investment funds. In contrast to the corporation form, an LP's income passes through the entity directly to the partners for tax purposes, and this elimination of double taxation has proved very attractive.

Other Partnerships

A general partner is liable for a share of the losses of the partnership.

The tax advantage of partnerships as against corporations applies to all partnerships. But there are also god reasons many investment funds adopt an LP in particular, rather than a General Partnership (GP).

The "limited partners" in an LP do not take personal liability for the obligations of the entity. A limited partner is in a position analogous to that of a stockholder in a corporation. The value of his investment cannot fall below zero.

Hub and Spokes

Investment funds often work in groups. There is typically a "hub and spoke" relationship. There will be distinct entities that market to, and disburse profits to, distinct sets of investors. They feed their assets into a common, or Master, portfolio, called the "hub." This allows for the spokes to take advantage of economies of scale in data processing and administration.

Onshore and Offshore

In some cases, the spokes will include one U.S. based LP, and one offshore corporation. The hub fund may also be set up as an offshore corporation, but through an election it may be treated as a partnership for U.S. tax purposes.

References

• The Entrepreneurs' Help Page: Partnerships
• Find Law: State Street v. Signature Financial Group
• Hedge Fund Association Asia: Offshore Fund Taxation

Resources

• International Chamber of Commerce: The Contractual Governance of Private Equity and Hedge Funds