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Hedge Fund Business Models
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Hedge Fund Business Models

paid-in investment. In fact, this type of structure is usually used for hedge
funds when the funds are located in areas with low or no income taxation.
In the United States, however, the C corporation is seldom used to struc-
ture a hedge fund due to the double taxation of investment returns. Hedge
fund management companies (the actual employees who invest the money)
are organized separately from the investment assets and may be structured
as a C corporation.
Professional Corporation
The professional corporation is used to structure businesses comprised of
certain professionals--medical, legal, financial services, architectural,
and other professionals. The laws governing the professional corporation
differ from state to state. Some state laws might allow a manager to
structure the management company as a professional corporation, rather
than a C corporation, but it is unlikely that a hedge fund (the investment
assets) would be structured as a professional corporation.
Limited Liability Corporation
The limited liability corporation (LLC) is a relatively new business struc-
ture; it has been approved in 48 of the 50 states in the United States. It
may be taxed as a corporation or a partnership. Nearly all businesses
structured as LLCs elect to be treated as partnerships to receive flow-
through tax treatment. The LLC structure also allows all investors, in-
cluding the fund sponsors and managers, to limit their liability to their
committed investment.
Sole Proprietorship
The sole proprietorship is the default structure an individual ends up with
if no effort is made to structure a business as a partnership or corporation.
The owner of the sole proprietorship also retains unlimited liability for the
liabilities of the business. So, despite a possible tax advantage over a cor-
poration, a sole proprietorship is not used in the hedge fund industry.
Partnership
There are several variations on the partnership structure. The variations
are fairly similar and closely resemble the general partnership in most re-
gards. In particular, all partnerships (and several other business structures)
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