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What does it take to start a hedge fund?

Business Structure
Getting the Tax Id Number
Becoming an Investment Advisor
Scheduling Your Exam
The "Registered Investment Advisor" vs. "Investment Advisor
Representative"
Registering Your RIA and IAR
Some Things to Consider
Registering Your Hedge Fund with the SEC
Obviously...
Starting a Hedge Fund
LLC vs Sole Prop
BUSINESS ENTITY OPTIONS
LIMITED LIABILITY COMPANIES
CORPORATIONS
GENERAL PARTNERSHIPS
LIMITED PARTNERSHIPS
SOLE PROPRIETORSHIPS
COMPARISON OF LIMITED LIABILITY COMPANIES AND C-
CORPORATIONS
Delaware Companies

What does it take to start a hedge fund?

Business Structure
Hedge Funds are typically structured as:
 a limited (or limited liability) partnership, or
 a limited liability company, or
 a trust.
What structure you choose depends entirely on what you want
and the laws in the state in which you are forming. (Non-U.S.
readers should explore the entities in their home countries as
well.)
For the remainder of this article, I'll be referring to the most
common hedge fund structure — the Limited Partnership, or LP.
To set up a limited partnership is fairly easy and inexpensive. In
Illinois, you answer six questions on a fill-in-the-blank form, get
a cashier's check for $150, and send it to the secretary of state.
How tough are the questions? If you can come up with a name
and write your address, you are in business.
Running Total: $150.00

Getting the Tax Id Number

You'll need to get a tax id [FEIN] number from the IRS. Simple
enough — go to the IRS website and get it online in a matter of
minutes. It's fast, easy, and free.
Running Total: Still $150.00

Becoming an Investment Advisor

If you will have 15 or more investors in your hedge fund, you'll
need to register as an investment advisor with the SEC. (Note:
That doesn't mean you'll have to register the hedge fund. We'll
get to that in a bit.) If you'll have less than 15 investors, you
may still have to register in one or more states. (See Rule 203(b)
(3)-2 of the Investment Advisers Act of 1940.) I'd play it safe
and register with the SEC. It's not scary — they're actually there
to help you so long as you are not defrauding investors.
To become an investment adviser, you'll need to sit for a
regulatory exam — the Series 65. The Series 65 is a 3-hour, 140
question exam, of which 130 count towards your final score. It's
not the hardest exam in the world (part of the "scary"
conversation above); but, you'll need to score a 68.5% or better
to pass.
The Series 65 doesn't teach you a darn thing about investing.
Instead, it's a "minimum competency" exam designed to test
your ethics and understanding of basic securities laws and
practices. A study guide and a few hours of quiet reading can
make you a pro.

Scheduling Your Exam

Your state will generally "sponsor" you to take the exam (as
opposed to the Series 7, which requires a firm's sponsorship); so,
you fill out Form U-10, sign over a check for $120, and schedule
your exam.
Once you've successfully completed the exam, you are now
licensed (though not yet registered) as an investment adviser.
Running Total: $270.00
The "Registered Investment Advisor" vs. "Investment Advisor
Representative"
At this point, you have a decision to make — Do you run your
partnership/advisory business as a sole proprietor (eg., Joe
Ponzio Sole Proprietor) or do you (as is more commonly done)
create an investment advisory company to shield yourself from
personal liability (eg., Joe Ponzio Funds, Inc.)?
To be safe, you create a corporation (or LLC, whatever) to act as
general partner of your LP. (Your investors will be the limited
partners). You're cheap; so, you create your Illinois corporation
for $175 instead of expediting for $300. Once incorporated, you'll
get a FEIN for your company as well.
Thus, you will personally be the Investment Advisor
Representative [IAR] of your company, which will act as the
Registered Investment Advisor [RIA].
Running Total: $445.00

Registering Your RIA and IAR

You're just about there. First, you have to register your company
as the RIA, which you will do through the Investment Adviser
Registration Depository [IARD]. The instructions are on the IARD
site; so, I'll spare you the details. It's not rocket science; but, it
will likely take you a few hours to figure it all out. (When I was
starting my firm, I spent the better part of three months figuring
all of this out. Then again, I didn't have an article like this one to
read!)
As of the time of this writing and through July of 2009, it is free
to set up your firm on the IARD system.
Once your firm is set up, you'll need to "register" yourself with
your firm by filing a Form U-4. Coming in at 28 pages, it looks
like a beast. (You can also file it electronically.) So long as you
don't have a lot of disclosures (eg., if you're not a criminal), you
won't fill in half of them.
Submit your U-4 with a $30 check...
Voila! You are now an investment adviser, running an
investment advisory firm and a hedge fund.
Total Cost: $475.00
I told you that it was scary easy.

Some Things to Consider

For less than $500, you could technically be in business. You'll
need a few things to get started:
For Your Investment Advisory Firm:
 By-laws
 Compliance manual
 Code of Ethics
 Supervisory Procedures Manual
 Investment Adviser/Portfolio Management Agreement
 Everything else to run your business (website, business
cards, etc.)
For Your Hedge Fund:
 A LP agreement
 Private Placement Memorandum
 A presentation or brochure about your proposed
investment style (needed for capital raising and road
shows)
 A custodian/brokerage account to house the fund's
securities
...along with checking accounts, etc.
If you are feeling really cheap, you can find a lot of this stuff
online, and then tweak it for your business; or, you can pay a
compliance service to provide you with many of these things.

Registering Your Hedge Fund with the SEC

Hedge funds don't technically register with the SEC. Instead,
you'll have to register your LP interests offering (corporations
have stock; LP's have interests; LLC's have memberships; trusts
have units of beneficial interest) with the SEC if you are offering
the hedge fund to investors other than friends and family.
So...you don't register your fund; you register your offering,
usually under Rule 506 of Regulation D of theSecurities Act of
1933.
Though there is no fee for registering your offering, you will have
to get a CIK number from the SEC and file Form D with the SEC
and with each state in which you plan to offer or sell interests.
Obviously...
Having gone through a lot of these steps over the years, it's a lot
easier for me to say than for you to do. Though I spent a few
months digging around in the dark to get my firm started, I can
now say that it is not all that difficult or expensive if I had to
start over again.
As you can see that hedge funds are not as mysterious as Wall
Street wants you to believe. In the end, a hedge fund is a
partnership — not some special entity — that has a general
partner (you or your investment firm) and limited partners (your
investors).
Then again, don't mistake this article as advice or compliance
help. This is a broad overview of how to set up a basic hedge
fund. The laws, rules, and regulations can change; so, make sure
you are up to speed based on your situation.

Starting a Hedge Fund

By and large there seem to be two groups of people in circulation these
days: those who want to run a hedge fund and those that want to invest
in them. For many, the dream of running a hedge fund is realized once
they move beyond the bounds of cocktail party chatter and investigate for
themselves what is required to set up a hedge fund. Luckily for Main
Street , the answers from Wall Street are amazingly simple. Today, pretty
much anyone with $15k or thereabouts can start a hedge fund. What
money cannot buy is talent, courage and entrepreneurial drive.
Traders and money managers often dream about one day running their
own hedge fund, managing large sums of money, and competing toe-to-
toe with the world's top traders. For the uninitiated, the first step toward
setting up a hedge fund is getting a better grasp on what exactly a hedge
fund is and what it is not.
Not a Mutual Fund. Unlike a mutual fund, a hedge fund is not open to any
and all investors and it cannot advertise for investors. Unlike a mutual
fund, a hedge fund can use any means necessary to make money. The
SEC does not allow a mutual fund manager to use derivatives or employ
shorting strategies to make money. As a mutual fund manger is limited to
taking long positions in stocks and in bonds, there is more risk to
investing in the typical mutual fund than investing in the typical hedge
fund. Unlike a mutual fund manager, a hedge fund manager can use long
and short positions and is better positioned to make money in good and
bad markets.
A mutual fund manager is paid on the basis of the amount of assets
under management and makes money even when he or she loses money
for investors. Unlike a mutual fund manager, a hedge fund manager is
paid primarily for results. Unlike a mutual fund manager, a hedge fund
manager often invests significant amounts of his or her own money into
the funds that they manage.
Unlike a mutual fund manager, a hedge fund manager must aggressively
preserve capital and make money for investors. Hedge fund managers
cannot afford to be “gunslingers” and take uncalculated risks since, as the
old adage states, “it takes money to make money.” For these reasons,
hedge funds are far more attractive to investors than mutual funds. It is
widely agreed that the best minds in the money management business
have moved from mutual funds and brokerages to the world of hedge
funds.
Hedge or Hedged Fund? The term “hedge fund” was reportedly coined by
Alfred Winslow Jones in the 1940s. Hedge funds are private investment
pools of money. Originally, a hedge fund invested in equities, used
leverage, and actually had to “hedge” and protect itself against market
swings by taking long and short positions. Only a hedging fund was
actually called a “hedged fund.”
A hedge fund is structured as a limited partnership structured to give the
general partner ( e.g., the fund manager) a share of the profits earned on
the limited partner's ( e.g., the investors) money. The profit sharing ( e.g.
called a “performance fee” if referring to an offshore fund or an “incentive
allocation” if referring to an onshore fund) is typically 20 percent of the
fund's profits. It is believed that probably about the time when the
powers that be on Wall Street changed the term from “hedged fund” to
“hedge fund,” it added on management fees. Management fees – typically
1 to 2 percent of assets under management — are paid to support the
cost of day-to-day fund operations. From an investor's standpoint,
management fees are unfortunate in that they cause fund managers to
focus on asset gathering rather than fund performance. The best hedge
funds are those that actually engage in arbitrage and employ hedging
strategies and duck or minimize management fees.
As noted, a genuine hedge fund has a manager that engages in arbitrage
and employs hedging strategies.
So-called “hedge fund managers” that use traditional, long-only equity
strategies and do not hedge in fact operate a type of mutual fund, and an
expensive one at that. A hedge fund manager that uses large amounts of
leverage to take long positions but fails to use short positions to protect
against market bottoms will most likely fail.
Though they represent a very small portion of the U.S. financial markets,
hedge funds are (reportedly) rapidly increasing in number and pose a
threat to world financial markets (allegedly). Whatever growth in the
industry exists, it is fueled by increased interest from both the top and
bottom levels of the investing public. At the top level, hedge funds attract
a mix of institutional investors, pension plans, funds of hedge funds,
endowments, and foundations seeking to diversify their portfolios. At the
bottom level (under $200 million in assets), hedge funds attract the
working wealthy and their IRAs, high net worth investors, family offices,
and small businesses looking for superior returns. This growth has not
escaped the notice of the SEC, which has expressed concerns about the
retailization of hedge funds and its potential impact on the securities
markets.
Getting Started
It is very easy for people to join the hedge fund industry. Setting up a
hedge fund gets easier every year. By networking, some of the best legal
and financial services talent in the business is either a click or a phone
call away. Brokerages, lawyers and accountants team up in order to
provide a one-stop shop approach to developing and launching a hedge
fund. Much of the consultation work (if not all of it) is conducted over the
phone or Internet.
Key items needed to start a hedge fund are the following: money, a
lawyer, a prime (or introducing) broker, office space (or a home office),
and eventually, an accountant.
Money.
The first people hedge fund managers tap for seed capital money are
friends and family members. It is hard to attract institutional investors to
a new fund. The first investors in a new fund are usually the fund
manager's close associates and family members who know and trust the
fund manager. As noted, all hedge funds have some if not most of their
manager's wealth invested in them.
Legal Services.
The legal development process normally begins with a planning
consultation. This is when important issues ( e.g., investment adviser
registration, location of the hedge fund and its management, reliance on
safe harbors and exemptions, etc.) are addressed and resolved. A good
legal consultation will expose areas (outside the legal process) that need
further planning. Once the course is charted, the legal development
process begins. The fund and management company entities are first
formed in their appropriate jurisdictions. This enables the fund manager
to begin the process of opening bank and brokerage accounts and
preparing for the administrative needs of the hedge fund. After the
entities are formed, the legal team gathers the necessary information to
form the operating agreements for the entities and then the offering
documents, first in draft stage and then finalized for distribution to
prospective investors.
Prime Broker Services.
Once the lawyer is engaged, the hedge fund is organized, and the offering
documents are drafted, the next thing needed is a relationship with a
prime (or introducing) broker. An introducing broker is a registered
broker/dealer that has an agreement with a prime broker to use that
firm's custody and clearing services. A good prime broker or introducing
broker will provide marketing and capital introduction services.
Conventional advertising and marketing of hedge funds is not allowed but
workarounds have been developed by brokers so that good fund
managers get the right kind of investor attention. When setting up a
hedge fund, it is best to stay away from the retail brokerage firms since
they are not geared toward hedge funds and the needs of hedge fund
managers.
Office Space.
Advances in technology and the proliferation of information have made
investment research and trading convenient as well as efficient. One can
work from any location where there is high-speed Internet service. As
everyone knows someone starting a hedge fund these days, the industry
cannot not keep track of all the hedge fund managers and their business
operations, whether based at home or at a hedge fund hotel. There is no
stigma to running a hedge fund from home. Hedge fund managers — the
best in the business — can and do work from home. Enough said.
Hedge Fund Mechanics.
To start a hedge fund, the aspiring hedge fund manager needs to set up
the hedge fund entity and the management company. In the United
States , the hedge fund is typically established as a limited partnership
and in some cases as a limited liability company. With hedge fund start
ups, the management company will also function as the hedge fund's
general partner and is set up as a limited liability company or, in some
special cases, as a corporation.
The lawyer is responsible for drafting the offering documents. Some fund
organizers try to draft their own set of documents or use a family
member who is a lawyer with experience in a specialty other than
securities law. In most cases, it will be obvious to the potential investor
that proper legal counsel was lacking. A poor set of offering documents is
a mark against the hedge fund manager.
One document that is of particular importance is the private placement
memorandum (PPM), since potential investors generally rely heavily on
the information that the PPM provides. The PPM is an extensive document
individually created for each hedge fund. Although there are no specific
disclosure requirements for the PPM (provided the offering is made solely
to accredited investors) and a lot of boilerplate language is used, basic
information about the hedge fund's manager and the hedge fund itself is
disclosed. The information provided is general in nature, and it normally
presents in broad terms the fund's investment strategies and practices.
For example, disclosures generally include the fact that the hedge fund's
manager may invest fund assets in illiquid, difficult-to-value securities,
and that the hedge fund manager reserves the discretion to value such
securities as he believes appropriate under the circumstances. Also often
included is a disclosure about the hedge fund manager having discretion
to invest fund assets outside the stated strategies. PPMs tend to be very
protective of the hedge fund manager. As a fallback measure, the PPM
will list every type of security, commodity, or futures contract in the
financial market to provide the hedge fund manager with freedom and
latitude to make money.
The PPM usually provides information about the qualifications and
procedures for a prospective investor to become a limited partner. It also
provides information on fund operations, such as fund expenses,
allocations of gains and losses, and tax aspects of investing in the fund.
Disclosure of lock-up periods, redemption rights and procedures, fund
service providers, potential conflicts of interests to investors, conflicts of
interest due to fund valuation procedures, “side-by-side management” of
multiple accounts, and allocation of certain investment opportunities
among clients may be discussed briefly or in greater detail, depending on
the fund. The PPM also may include disclosures concerning soft dollar
arrangements, redirection of business to brokerages that introduce
investors to the fund, and further disclosure of how soft dollars are used.
Copies of financial statements may be provided with the PPM.
Fiduciary Audits.
In theory, the investment policy and strategy sections of the PPM exist to
help investors evaluate the hedge fund as an investment opportunity.
Therefore, PPMs should be written with accountability in mind. Consider
the PPM that states that “the goal of the fund is capital preservation.”
Unless capital preservation is clearly defined in terms of asset allocation,
one might expect that all of the fund's assets consist of principal
protected investments with specific maturity dates as such investment
would most likely preserve capital. Given this, PPMs should not state
capital preservation as a goal unless the fund invests in items that return
the principal investment. When used in a PPM, the terms “capital
preservation,” “liquidity and marketability,” “risk aversion” need to be
defined (and adhered to by the hedge fund manager) with a future audit
in mind.
In the future, there may be a trend toward investment policy audits (at
the top levels of the hedge fund industry). An investment policy audit
evaluates whether the hedge fund manager is in compliance with the
statements made in the investment policy and investment strategy
section of the PPM. An asset allocation audit examines whether the fund's
portfolio is within the range of a PPMs stated asset allocations
percentages.
Time Line.
The legal process of setting up a hedge fund usually can be completed
within 60-90 days, though registration as an investment adviser,
specialized circumstances, or delays in providing information can lengthen
the fund launch process.
Accredited Investors
Offerings made to “accredited investors” exclusively are exempt from
disclosure requirements under Rule 506. Before you allow an investor into
your hedge fund, you will need to determine if a prospective investor is
accredited. There are two tests for accreditation: the Income Test and the
Net Worth Test. Generally, accredited investors include individuals with a
minimum annual income of $200,000 ($300,000 with spouse) or $1
million in net worth and most institutions with $5 million in assets.
Income Test
The Income Test states that any natural person who had an individual
income in excess of $200,000 in each of the 2 most recent years or joint
income with that person's spouse in excess of $300,000 in each of those
years and has a reasonable expectation of reaching the same income
level in the current year is an accredited investor. Though joint spousal
income can be used to establish accredited investor status, proposed
investors cannot use separate income for one year and joint income for
the next year to meet the Income Test.
What is Income?
 Salary and bonus income;
 Taxable income (gross receipts less cost of goods or services and
expenses) in the case of sole proprietorships;
 Distributable income from trusts and partnerships;
 Interest and dividend income excluding unrealized gains; and
 Vested contributions to a profit-sharing or pension plan made on
behalf of an individual.
Future income is relevant. You are required to inquire into the proposed
investor's income for the year in question to determine whether an
individual can meet the income levels.
You cannot simply accept a proposed investor's representation as to his
future income. If the prospective investor has a consistent pattern of
income that exceeds $ 200,000, or $300,000 joint income, the investor's
representation is acceptable. If the proposed investor's past income
includes unusual and non-reoccurring income, you should request that the
proposed investors provide you with an audited (or CPA confirmed)
income statement.
Net Worth Test
Any natural person whose individual net worth, or joint net worth with
that person's spouse, at the time of purchase exceeds $1,000,000 is an
accredited investor. Neither the Securities Act of 1933 nor the various
rules and interpretations associated with the law in this area define
exactly what makes up net worth.
To determine net worth, a spouse's assets can be counted even if only
one is the purchaser and does not exclude any of the purchaser's assets
(e.g., home, furnishings, clothing, jewelry, etc.) from determination of
net worth.
When in doubt of a proposed investor's income or net worth, the best bet
is to request a no-action letter from the SEC or to request that
prospective investors provide you with an audited (or CPA confirmed)
financial statement of net worth or income.
Partnerships and Corporations as Accredited Investors
The net worth of all the partners in a general partnership proposed
investor may be combined to establish accredited investor status (which
may be greater than the net worth of the general partnership itself). The
net worth of a consolidated group of corporations may be combined as
well.
Trusts as Accredited Investors
The net worth of the grantor and not the trust or its beneficiaries is to be
considered where the trust is revocable. With respect to an irrevocable
trust, the net worth of the trust itself must be evaluated to determine
whether the net worth requirement is met. The grantor of an irrevocable
trust will be deemed the purchaser where the grantor possesses
significant rights with respect to the trust. Note, however, that if a bank is
acting as fiduciary, any trust can qualify as an accredited investor under
Rule 501(a)(1).
You should obtain from proposed investors considered to be accredited
investors the following:
 Representations and financial information confirming net worth in
the case of investors whose accredited net worth status depends on
net worth exceeding $1 million; and
 Representations and copies of relevant portions of individual tax
returns, along with representations as to the expectation of the
level of future income, in the case of the investor whose accredited
status depends on income.
List of Accredited Investor Tests
In addition to the Income and Net Worth Tests, there are other accredited
investor categories. They are listed below. In all cases, a proposed
investor must have knowledge and experience in financial and business
matters so as to be capable of evaluating the relative merits and risks of
an investment in your fund.
Individual with Net Worth In Excess of $1.0 Million. A natural
person (not an entity) whose net worth, or joint net worth with his or her
spouse, at the time of purchase exceeds $1,000,000. (Explanation: In
calculating net worth, you may include your equity in personal property
and real estate, including your principal residence, cash, short-term
investments, stock and securities. Your inclusion of equity in personal
property and real estate should be based on the fair market value of such
property less debt secured by such property.)
Individual with a $200,000 Individual Annual Income. A natural
person (not an entity) who had an individual income of more than
$200,000 in each of the preceding two calendar years, and has a
reasonable expectation of reaching the same income level in the current
year.
Individual with a $300,000 Joint Annual Income. A natural person
(not an entity) who had joint income with his or her spouse in excess of
$300,000 in each of the preceding two calendar years, and has a
reasonable expectation of reaching the same income level in the current
year.
Corporations or Partnerships. A corporation, partnership, or similar
entity that has in excess of $5 million of assets and was not formed for
the specific purpose of acquiring an Interest in the Partnership.
Revocable Trust. A trust that is revocable by its grantors and each of
whose grantors is an accredited investor. (If this category is checked,
please also check the additional category or categories under which the
grantor qualifies as an accredited investor.)
Irrevocable Trust. A trust (other than an ERISA plan) that (i) is not
revocable by its grantors, (ii) has in excess of $5 million of assets, (iii)
was not formed for the specific purpose of acquiring an Interest, and (iv)
is directed by a person who has such knowledge and experience in
financial and business matters that such person is capable of evaluating
the merits and risks of an investment in the Partnership.
IRA or Similar Benefit Plan. An IRA, Keogh or similar benefit plan that
covers a natural person who is an accredited investor. (If this category is
checked, please also check the additional category or categories under
which the natural person covered by the IRA or plan qualifies as an
accredited investor.)
Participant-Directed Employee Benefit Plan Account. A participant-
directed employee benefit plan investing at the direction of, and for the
account of, a participant who is an accredited investor. (If this category is
checked, please also check the additional category or categories under
which the participant qualifies as an accredited investor.)
Other ERISA Plan. An employee benefit plan within the meaning of Title
I of the ERISA Act other than a participant-directed plan with total assets
in excess of $5 million or for which investment decisions (including the
decision to purchase an Interest) are made by a bank, registered
investment adviser, savings and loan association, or insurance company.
Government Benefit Plan. A plan established and maintained by a
state, municipality, or any agency of a state or municipality, for the
benefit of its employees, with total assets in excess of $5 million.
Non-Profit Entity. An organization described in Section 501(c)(3) of the
Internal Revenue Code, as amended, with total assets in excess of $5
million (including endowment, annuity and life income funds), as shown
by the organization's most recent audited financial statements.
Other Institutional Investor
 A bank, as defined in Section 3(a)(2) of the Securities Act (whether
acting for its own account or in a fiduciary capacity);
 A savings and loan association or similar institution, as defined in
Section 3(a)(5)(A) of the Securities Act (whether acting for its own
account or in a fiduciary capacity;
 A broker-dealer registered under the Exchange Act;
 An insurance company, as defined in section 2(13) of the Securities
Act;
  A “business development company,” as defined in Section 2(a)(48)
of the ICA ;
 A small business investment company licensed under Section
301(c) or (d) of the Small Business Investment Act of 1958, as
amended; or
 A “private business development company” as defined in Section
202(a)(22) of the Investment Advisers Act of 1940, as amended.
Executive Officer or Director. A natural person who is an executive
officer, director or general partner of the Partnership or the General
Partner.
Entity Owned Entirely By Accredited Investors. A corporation,
partnership, private investment company or similar entity each of whose
equity owners is a natural person who is an accredited investor. (If this
category is checked, please also check the additional category or
categories under which each natural person qualifies as an accredited
investor.)
Of course, the hedge fund may wish to allow non-accredited investors
into the fund, in which case it will not be exempt from disclosure
requirements. Moreover, even if the fund will only open to “accredited
investors,” those investors will want information about the fund before
buying into it. Indeed, prospective investors will often subject the fund
and its managers to an extensive process of due diligence. Investors
often spend significant resources, frequently hiring a consultant or a
private investigation firm, to discover or verify information about the
background and reputation of a hedge fund adviser. Prospective investors
may gain access to brokers, administrators, and other service providers
during the initial due diligence process, verifying most information
contained in the PPM (including the adviser's history). Since the PPM
usually is the starting point for those conducting due diligence, it remains
a crucial document, even for offerings made exclusively to “accredited
investors.”
Proposed Change to Accredited Investor Standard
In mid-December of 2006, the SEC voted to propose several new rules
that are intended to provide additional protections to investors in hedge
funds. One of the proposals would define a new category of accredited
investor that would be used for offers and sales of securities issued by
hedge funds and other private investment pools to natural persons (e.g.,
individuals). The proposed definition would include any natural person
who (a) meets either the net worth test or income test specified in rule
501(a) or rule 215, as applicable, and (b) owns at least $2.5 million in
investments, as defined in the proposed rules. The SEC states that rule
proposal to increase accredited client standards reflects its concerns over
the retailization of the hedge fund industry and desire to protect
unsophisticated investors.
The foregoing SEC proposed rule change, if adopted, would not affect
hedge fund managers with less than $30 million under management,
unless the state in which the hedge fund manager is based in adopts
some form of the proposed the SEC rule (not a likely event outside of
California).
Another rule proposal would create an anti-fraud rule that would have the
effect of looking through a hedge fund to its investors. The proposal
would make it a fraudulent, deceptive, or manipulative act, practice, or
course of business for an investment adviser for a pooled investment
vehicle to make false or misleading statements or to otherwise defraud
investors or prospective investors in that pool. The rule as proposed
would apply to all investment advisers for pooled investment vehicles,
regardless of whether the investment adviser is registered with the SEC.
Investment Adviser Registration
In some cases (subject to a state-by-state determination), a hedge fund
manager will have to register with his or her state as an investment
adviser if he or she has less than $25 million under management. If the
fund manager has more than $30 million under management, he would
need to register with the SEC as an investment adviser once he has 15
clients.
In August of 2006, the U.S. Court of Appeals vacated the SEC's rule that
required more fund managers to register as investment advisers via an
expanded definition of a “client” under the Investment Advisers Act of
1940. The expanded definition of a “client” imposed a look through rule
counting every investor in a hedge fund as a client of the fund manager.
The SEC did not appeal the decision of the court to nix this expanded
definition of a client.
As a result, for purposes of SEC (not state) investment adviser
registration, any hedge fund manager with $30 million or more under
management that has had fewer than 15 clients in the past 12 months
and does not hold himself out as an investment adviser can avoid
registration. For investment advisers based outside the United States ,
only U.S. clients are counted.
As a practical matter, “holding out” would seem to be a moot question in
the case of the hedge fund manager that acts to increase funds under
management by seeking additional investors, and registration should be
considered seriously on those grounds alone once the fund manager has
more than 15 investors in the fund he or she manages. If the fund
manager is actively adding investors to its hedge fund, it is hard to
believe that the fund manager is not “holding out” his services as an
investment adviser (despite the view of some that hedge fund investors
are spontaneously generated without any effort at all).
For those hedge fund managers with less than $30 million under
management, state investment adviser registration issues are relevant. It
is impossible to make a blanket statement pertaining to registration
requirements and exemption options, except to say that they vary by
state and fund structure. In general, the strictest states are located on
the West Coast, with the state of Utah and Colorado being the most
hostile toward hedge funds and hedge fund managers. Texas and Arizona
are strict states, but very fair in their approach to regulating hedge fund
managers. California is one of the slowest states to process investment
adviser registration. On the East Coast the toughest states in which to
base hedge fund management, due to strict approach to regulating of
investment advisers, are New Hampshire , Connecticut and Massachusetts
.
In those states where the fund manager must register as an investment
adviser, the Series 65 (or its equivalent) is required, unless the state is
satisfied with some other credential, such as that of a Certified Financial
Planner. No sponsor is needed to take the Series 65 exam.
Side Letters
Investments in a hedge fund are subject to the fund's offering documents
(PPM, limited partnership agreement, etc.). A hedge fund manager may
enter into a separate agreement ( e.g., side letter) with an investor in the
hedge fund. Typically, seed capital investors and large institutional
investors seek preferential terms from a hedge fund's manager in a side
letter. A side letter provides preferential treatment to the investor that
obtains the side letter. Other investors in the fund do not benefit from the
terms of the side letter. Side letters cover a range of topics. They may
provide the investor with reduced fees or impose limits on the expenses
that can be charged to the hedge fund. Side letters may grant the
investor special redemption rights ( e.g., no “claw back,” a percentage of
the amount redeemed that is held back from the investor for a specified
period of time) and modify the lock-up period ( e.g., a time period during
which an investor cannot redeem money from the hedge fund) or notice
period for withdrawals from the hedge fund. Some side letters provide the
investor with daily or weekly net asset values for the fund and
information on levels of leverage and risk. They may also grant to an
investor “most favored nation” status. This status automatically provides
an investor the most favorable terms or conditions granted to other
investors through side letters.
The problem with side letters is that they may create a new share class in
the fund and/or cause a breach in the hedge fund manager's fiduciary
duty to the hedge fund. Fiduciaries of a hedge fund owe an identical
obligation to each investor in the fund. Should a side letter favor one
investor at the expense of another, legal complications could arise. In
some cases, the terms of a side letter may be so unique that the investor
is arguably, in legal and economic senses, a separate client of the fund
manager rather than just another investor in the fund.
Incubator Hedge Funds
There is an alternative approach for hedge fund managers who want to
test the waters before spending $15k or more to set up a hedge fund.
Setting up an incubator hedge fund allows a hedge fund manager to
develop a track record which will assist in attracting investors later in
time.
An “incubator” can be created by breaking down the hedge fund
development process into two stages and isolating the first.
Stage One. The first stage sets up the hedge fund and management
company, and creates the required operating documents and resolutions.
Completion of the first stage allows the hedge fund to begin trading and
developing an auditable performance record. The incubator fund, in
nearly all cases, is seeded with the fund manager's money. By trading
under this structure, the hedge fund manager develops a track record,
which, once audited by an accountant, can be marketed legally to
potential investors through the offering documents which are developed
in the second stage.
Stage Two. In the second stage, the offering documents are developed
and an audit of the fund is completed by an accountant. The offering
documents, with the financial statement of the hedge fund, is circulated
to prospective investors.
Starting out with an incubator method affords the opportunity for those
with a skill for trading (often in their personal accounts) to break down
the hedge fund development process into a cost manageable undertaking.
One of the caveats of the incubator approach to launching a hedge fund is
that the aspiring fund manager is not paid for trading his own money. The
acceptance of third party money (and whether this is permitted depends
on the state or country where hedge fund management is based), creates
a fiduciary obligation and risk for which the hedge fund manager is not
paid. Acceptance of third party money into an incubator fund, in the rare
case when allowable, is not recommended, given the legal exposure it
creates for the hedge fund manager.
Offshore
Hedge funds are set up as offshore or onshore funds to allow for different
groups of investors. U.S. based hedge fund managers who have
significant potential investors outside the United States and/or U.S. tax-
exempt investors typically create offshore funds. Many hedge fund
managers use offshore hedge funds to provide privacy to investors. In
those cases where complete investor confidentiality and privacy are
necessary, an offshore fund should not accept U.S. investors and the fund
manager should not be based in the United States .
Confusing to some is the use of onshore and offshore funds in a
master/feeder structure. The master/feeder structure allows a hedge fund
manager to manage money for a broad spectrum of investors. The master
fund, structured as an offshore corporation (but treated as a partnership
for U.S. tax purposes via a “check-the-box” election), engages in all
trading activity. A hedge fund manager will pool money and “feed” it in to
a master fund and allocate trading gains and losses back to the onshore
and offshore feeder funds based on the percentage assets under
management in each feeder fund. A master/feeder structure typically
includes (in addition to the master fund company) a U.S. limited
partnership or limited liability company as the feeder fund for U.S.
taxable investors and a foreign corporation as the offshore feeder for
foreign investors and U.S. tax-exempt investors.
If U.S. taxable investors invest in or effectively control an offshore hedge
fund, some complex U.S. tax rules applicable to controlled foreign
corporations, foreign personal holding companies, or passive foreign
investment companies (PFIC) need to be addressed. However, these rules
are manageable when knowledgeable tax advisors are on board.
An offshore fund is set up outside of the United States in offshore
financial centers (“OFC”) and is usually managed from a low or zero tax
jurisdiction. OFCs are countries that cater to the establishment and
administration of mutual and hedge funds. Offshore funds generally
attract the investment of U.S. tax-exempt entities, such as pension funds,
charitable trusts, foundations, retirement plans and accounts, and
endowments, as well as non-U.S. residents.
U.S. tax-exempt investors favor investments in offshore hedge funds
because they may have exposure to U.S. taxation if they invest in U.S.
based hedge funds. Under U.S. tax laws, a tax-exempt investor (such as
an IRA, an ERISA-type retirement plan, a foundation, or an endowment)
is liable for income tax on “unrelated business taxable income” (“UBTI”),
notwithstanding its tax-exempt status. UBTI exposure exists when a U.S.
tax-exempt investor invests in a hedge fund that uses leverage (e.g.,
trades on margin). The UBTI tax is avoided by investing in an offshore
hedge fund. A U.S. based hedge fund manager should consider setting up
an offshore fund if he or she manages money for foreign and/or U.S. tax-
exempt investors.
For a new hedge fund manager who is a small operator and for whom the
extra costs are a major burden, the best location to launch an offshore
hedge fund or a master feeder fund is the Cayman Islands or the
Bahamas . Both countries have tiered statutory regimes for hedge funds,
allowing hedge funds to start out as unregistered funds and then later
upgrading to registered fund status if necessary. Hedge fund attorneys in
both countries are familiar with hedge fund start ups and will work with a
new hedge fund manager. Related service providers (accountants,
administrators, etc.) in both countries are good, with the Cayman Islands
offering a greater number of service providers.
Good News
Despite some bad press, hedge funds are here to stay and remain an
intriguing topic du jour. Hedge funds are no longer for the elite. Hedge
funds will grow in good and bad times because they have complete
market freedom. The hedge fund industry has years of success ahead of
it. With respect to traditional mutual funds, it is safe to say that the
market is self correcting and that investors will continue to gravitate away
from them toward hedge funds. In a capitalist country, talented money
managers will find profitable outlets for the skills, regardless of
government regulation. Hedge funds are about making money and
running a hedge fund is a great way to do so. Starting a hedge fund is
probably one of the most efficient ways to make money today.
AUTHOR
Hannah M. Terhune, JD, LLM
([email protected]), is Partner and Chief
Attorney for Capital Management Services Group, PLLC . Ms. Terhune
specializes in hedge funds, international and domestic tax, shareholder
litigation, and business law. In addition to practicing law, she lectures
about tax, accounting, and business law at two universities in
Washington, D.C. She also contributes articles to prominent publications

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nd.html

LLC vs Sole Prop

http://nolonow.nolo.com/noe/popup/NNLLCCABAS_faq.html
http://www.nolo.com/legal-encyclopedia/article-29694.html

http://www.traderstatus.com/entities.htm
http://www.investopedia.com/articles/trading/09/incorporate-active-trading.asp

BUSINESS ENTITY OPTIONS

In the United States, there are various forms of business entities.
Depending on which form is chosen, your tax and ownership
considerations change. The most common forms of business entities are:

 Limited Liability Company (LLC)

 Corporations ("C" Corporations and "S" Corporations)
 Partnership (General or Limited Partnerships)
 Sole Proprietorship

LIMITED LIABILITY COMPANIES

95% of our clients choose a Limited Liability Company (“LLC”) as the
preferred Company registration choice.

A U.S. Limited Liability Company (also known as a “LLC”) is actually a

hybrid business entity which allows a person or persons to operate their
business while limiting risk to their personal assets and limiting their
personal liability, without the business, tax and legal complexity of the also
commonly used corporation. Unlike a corporation, an LLC does not issue
shares and its owners are referred to as “Members”. Member’s ownership
is represented by a proportional ownership interest (as set forth in the
“Operating Agreement”), rather than by individual issued shares.

Every State in the United States now allows for Limited Liability
Companies. While there are ifferences in the law from State to State, the
fundamental concepts are essentially the same.

 It is a separate legal entity just like a corporation.

 It does not have shareholders. An LLC has “Members”.
 An LLC’s Members are personally protected with Limited
Liability. Their personal liability is generally limited to the amount
invested in the LLC, provided all rules are followed. It is
absolutely essential that you be advised by a U.S. attorney in
order to avoid the mistakes commonly made by non-lawyer
“company registration businesses”.
 For U.S. registration the Members can be physical persons or
business entities, including corporations, partnerships, trusts etc.
 Non-residents can be a Member of the LLC.
 An LLC is generally taxed like a partnership which has the
benefit of flow-through taxation. If a partnership taxation regime
is elected, there are no corporate taxes paid at the Company
level and all profits are passed through to the Members in
proportion to their ownership interest in the LLC.
 Can be formed with any number of Members, including only one
Member.
 An LLC does not pay taxes; its resident members are tax liable
as personal income similar to a partnership. Non-resident
members are liable for taxes on income derived only from the
US.
 Foreign members are not individually liable to tax and don't have
to file tax forms if the income derived is not from the United
States.

CORPORATIONS
A corporation is limited by shares and carries with it some protection for its
stockholders. The corporation pays taxes on its earnings and the owners
pay taxes on the distribution of profits, after tax (dividends), which makes it
effectively a double taxation entity. The corporation is formed by filing
Articles of incorporation with the Secretary-of-State and the control of the
corporation is the responsibility of the Board of Directors, scrupulous
records and accounts must be kept.

A Subchapter "S" Corporation is a variation of the "C" Corporation and is

governed under a different IRS Tax Code. The "S" Corporation is allowed
the flow-through taxation treatment similar to that of a partnership and sole
proprietorship. Double taxation is thereby avoided by its
owners/shareholders. The limitations however are that:

 Ownership is limited to 75 stockholders.

 Owners cannot be corporations, partnerships, pension plans,
charitable organizations, certain trust.
 Non-resident aliens cannot be shareholders.
To maintain subchapter "S" Corporation status and therefore flow-through
taxation status, there is a requirement for strict compliance with very strict
rules.

There are rare circumstances in which a corporate structure is preferable

for our clients over a Limited Liability Company. However, most of our
clients choose Limited Liability Companies as their preferred business
entity.

GENERAL PARTNERSHIPS
A General Partnership is formed when two or more persons join together
to conduct a business or trade. A verbal agreement between the partners
is enough to form the partnership. However, a written agreement is
encouraged. There are no filing or registration requirements. Each partner
is taxed on his share of the profits as distributed by the partnership and
treated as personal income.
The downside to this business entity is that partnership debt and other
liabilities are the responsibility of the partners and extend to their personal
assets.

LIMITED PARTNERSHIPS
A Limited Partnership is very similar to the General Partnership, however,
the Limited partners are not liable for partnership debt and only their
investment is at risk. In the Limited Partnership, there must be a general
partner who has total management responsibility. If the limited partner gets
involved in management, they risk losing their liability protection. The
Limited Partnership is required to file a document with the Secretary-of-
State and the partnership is governed by a Limited partnership Agreement.
Taxation is on a personal income basis (flow-through taxation) and the
partnership is limited to 35 members.

SOLE PROPRIETORSHIPS
A sole proprietorship is the entity in which a person opens a business
alone without incorporation or any agreement with others. No forms or
filing is required and the tax liability is the sole responsibility of the owner
on an individual basis. Any debt or other liability is totally the responsibility
of the proprietor and to the full extent of all his personal and business
assets. We do NOT recommend non-U.S. residents utilize this form of
business.

COMPARISON OF LIMITED LIABILITY COMPANIES AND C-

CORPORATIONS
DESCRIPTIONLIMITED LIABILITY COMPANY (LLC)C-CORPORATION
Formation Requirements And Government CostsMust file Articles with the
Secretary of State in the State you have chosen as your company “home State”.
There is a filing fee paid to the Secretary of State which varies from State to
State. For a State by State guide to filing fees, please CLICK HERE.Must file
Articles with the Secretary of State in the State you have chosen as your
company “home State”. There is a filing fee paid to the Secretary of State which
varies from State to State. For a State by State guide to filing fees, please
CLICK HERE.
Type of OwnershipOwnership in an LLC is represented by proportional
“Membership Interests” expressed as a percentage ownership interest. Different
classes of membership are usually permitted. There are no stocks issued and
there are no "shareholders". The owners are referred to as "Members" rather
than “shareholders”.Ownership in a C-corporation is evidenced by issued stock
shares and they relative ownership interest of individuals is determined by the
number and type of shares that they own. There maybe different classes of
stock shares such as common stock, Class A, Class B, Preferred shares, etc.,
each of which may have different attributes and entitle the share owner to
different rights.
Liability of OwnersThere is limited personal liability for owners (Members).
Members are not generally held personally liable for debts or other obligations
of the LLC except to the extent of their interest in the LLC.There may be some
limitation on liability for shareholders, with a limitation on liability to the extent of
their shareholdings. Officers and Directors are not generally liable for the debts
of the corporation but, may be personally liable for malfeasance, acts exceeding
their authority or breaches of fiduciary duties. ORATION
 Ownership AgreementGenerally known as an “Operating Agreement”, this
document establishes and defines the relationships between the members,
including defining their capital contributions and proportional ownership
interests. The Operating Agreement also generally defines the operating
parameters of the business and defines the management structure and the role
of various members in the operations of the LLC.Generally defined by a
“Shareholders Agreement” which defines the relative rights and responsibilities
of shareholders.
Eligible OwnersThere are generally no restrictions. An LLC may be formed by
single individual or entity or by more than one Member or entity. The Member(s)
may be Non-U.S. residents.There are generally no restrictions. An owner may
be a Non-U.S. resident individual or a Non-U.S. resident corporation. A C-
Corporation can be owned by one shareholder - "sole owner" or by an unlimited
number of shareholders.
ManagementMay be managed by all Members collectively or by a designated
Manager who is usually, but not necessarily a Member and is referred to as the
“Managing Member” whose duties are defined in the Operating Agreement.
Members and/or Managers, including Managing Members may be a Non- U.S.
Resident and they are not required to be present in the U.S. in order to perform
their functions for the LLC.Generally, managed by Director(s) and Officer(s).
Director(s) and Officer(s) may be a Non- U.S. Resident. Shareholders elect
Directors who manage business activities in accordance with the By Laws of
the corporation..
Administrative RequirementsFew administrative requirements. Generally, LLC
are intended to be relatively easy to administer. Administrative requirements are
generally defined by the Operating Agreement. Some states require filing an
annual report.May be considered burdensome in comparison to LLC,
particularly for small and medium enterprises. Administrative requirements
include, but are not limited to, elections of Board of Directors/Officers, annual
meetings, annual report filing requirements, in some instances publication of
certain actions taken by the corporation, etc. Record keeping requirements are
more exacting and, in most cases somewhat more burdensome.
Ease of OperationRelatively simple and, for the most part, operating
requirements are defined by the Operating Agreement which the Members have
created and agreed to.You must have annual meetings, Board of Director’s
meetings, maintain corporate minutes and other detailed records, hold
stockholder meetings and, in some instances, publication of certain actions of
the corporation is required.
Transfers of Ownership InterestsThere may be some restrictions under certain
State laws but, generally, restrictions outlined in the Operating Agreement
govern restrictions on transfers of ownership interest. Such restrictions on
transfer of ownership interest are usually beneficial to the owners in a properly
drafted Operating Agreement.Shares are generally freely transferable from one
shareholder to another. There are generally no restrictions or limitations unless
specifically enumerated in a shareholder agreement.
CapitalMembers may sell interests subject to Operating Agreement. Securities
laws may also apply in limited circumstances. Capital contribution of Members
 generally determinesShares of stock are sold to raise capital. Specific securities
laws apply to share offerings in most cases.
Tax Upon SaleThere is a single tax levy at member level upon sale of
appreciated assets thereby avoiding double taxation. Generally, there is no tax
on distribution of appreciated assets upon sale.A serious drawback for many
persons considering what type of entity to form. Potential double taxation.
Corporation may be taxed on sale of assets while the shareholders are also
taxed on dividends or capital gains.
Pass Through of LossesLosses passed through to members, subject to certain
restrictions. This may be a substantial benefit to Members of an LLC.Losses not
passed through which may be a substantial loss for shareholders of a
corporation.
Fiscal YearUses tax year of members having a majority interest in the LLC, or
the tax year of all principal members if there is no majority member.May use
any fiscal year with the exception of Personal Service Corporations which must
use a calendar year, subject to certain exceptions.
TaxationNo tax at the entity level. Income passed through to members.Taxed at
corporate rate and possible double taxation: Dividends are taxed at the
individual level if distributed to shareholders.
Double TaxationNo double taxation.Yes, taxed first at the corporate level and
then again if distributed to shareholders in the form of dividends.
Pass Through Tax TreatmentYes. A substantial benefit of LLC use in most
cases.No
DurationDissolves at the time specified in the Operating Agreement or upon the
loss of a member unless other members agree to continue.Indefinitely.
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Delaware Companies

- STATE OF DELAWARE
- POLITICAL CONDITIONS
- LEGAL ENVIRONMENT
- LIMITED LIABILITY COMPANY (LLC)
- ADVANTAGES OF DELAWARE
- POWERS OF LLC
- FORMATION OF LLC
- CERTIFICATE OF FORMATION
- MEMBERS
- MANAGERS
- FINANCE
- RECORDS
- FEES
- TAXATION OF LLC
- REGISTRATION REQUIREMENTS
- REGISTRATION SET OF DOCUMENTS

STATE OF DELAWARE

The State of Delaware is located on the east coast of the United States of America,
between New Jersey and Washington DC, and to the south of the city of
Philadelphia. Major cities of Delaware are in close proximity to Philadelphia
International Airport. Delaware was declared the first state of the Union in 1787. The
capital of the state is in Dover – a major financial center with dozens of multinational
banks and financial institutions. The population is 690 thousand people. Official
language is English.

POLITICAL CONDITIONS

Very stable democracy. Three branches of the government are: Legislative, Judicial
and Executive. The Congress with the Senate and the House of Representatives
represents legislative branch.

LEGAL ENVIRONMENT

For almost a decade there are more companies being registered in Delaware than
anywhere else. Delaware is recognized as the most popular jurisdiction. The
registration process is the fastest and easiest in the world. Close to half of the U.S.
top 500 corporations are registered here. The Congress passed recently a set of
additional measures giving preferential treatment to companies registered in
Delaware. It means that chances are that in foreseeable future Delaware will remain
to be the most attractive jurisdiction.

LIMITED LIABILITY COMPANY (LLC)

Limited Liability Company (LLC) can offer a lot of advantages if registered in

Delaware.
If you are not in banking or insurance business you may find it attractive to use LLC.
LLC represents a legal hybrid between a corporation and a partnership and
combines the best of both worlds. You can have it structured any way to
accommodate for desired income distribution. Ownership schedule will remain
confidential and is not a part of public domain.
LLC requires one or more owners. Owners can be individuals or legal entities, both
domestic and foreign. Owners are not personally liable for debts or other obligations
of LLC. Their liability is rather limited to the actual amount invested in LLC. In other
words, owners can lose only what they have invested. There are no general partners
among owners and they all share the same limited liability regardless of actual size
of ownership interest.

ADVANTAGES OF DELAWARE

- Computerized fast and easy registration procedure with electronic

 Certificate of Incorporation/Registration. Among other papers you will
 receive a certified hard "copy" of a Certificate.
- You can do any business, which is not prohibited by law or requires
 licensing.
- There are no restrictions on citizenship or residency of owners.
- Corporate papers are identical to those of U.S. origin.
- Data on owners is not publicly available and will remain confidential.
- There are no preset limits on duration of business. Every company
 however that failed to pay annual fees for three years in a row will be
 liquidated.
- A liquidated company might be reopened upon execution of all dues and
 fees.

POWERS OF LLC

A limited liability company may carry on any lawful business, purpose or activity,
whether or not for profit, with the exception of the business of granting policies of
insurance, or assuming insurance risks or banking.
A limited liability company shall possess and may exercise all the powers and
privileges granted by Delaware LLC Act or by any other law or by its limited liability
company agreement, together with any powers incidental thereto, so far as such
powers and privileges are necessary or convenient to the conduct, promotion or
attainment of the business, purposes or activities of the limited liability company
(§18-106).

FORMATION OF LLC

Two things are required under the Delaware LLC Act in order to properly form a
Delaware LLC:
- A written LLC agreement and
- A certificate of formation duly filed with the Delaware Secretary of State.

CERTIFICATE OF FORMATION

In order to form a limited liability company, 1 or more authorized persons must

execute a certificate of formation. The certificate of formation shall be filed in the
Office of the Secretary of State and set forth:
- The name of the limited liability company;
- The address of the registered office and the name and address of the
 registered agent for service of process required to be maintained by
 §18-104 of this title; and
- Any other matters the members determine to include therein
 (&18-201a).

A limited liability company is formed at the time of the filing of the initial certificate of
formation in the office of the Secretary of State or at any later date or time specified
in the certificate of formation. A limited liability company shall be a separate legal
entity, the existence of which as a separate legal entity shall continue until
cancellation of the limited liability company’s certificate of formation (&18-201b).

The name of the LLC

The name of each limited liability company
- Shall contain the words "Limited Liability Company or the abbreviation
 "L.L.C." or the designation "LLC";
- May contain the name of a member or manager;
- Must be such as to distinguish it upon the records in the office of the
 Secretary of State from the name of any corporation, limited
 partnership, business trust, registered limited liability partnership or
 limited liability company reserved, registered, formed or organized under
 the laws of the State of Delaware or qualified to do business or
 registered as a foreign corporation, foreign limited partnership or foreign
 limited liability company in the State of Delaware; provided, however,
 that a limited liability company may register under any name which is not
 such as to distinguish it upon the records in the office of the Secretary of
 State from the name of any domestic or foreign corporation, limited
 partnership, business trust, registered limited liability partnership or
 limited liability company reserved, registered, formed or organized under
 the laws of the State of Delaware with the written consent of the other
 corporation, limited partnership, business trust, registered limited liability
 partnership or limited liability company, which written consent shall be
 filed with the Secretary of State; and
- May contain the following words: "Company", "Association", "Club",
"Foundation", "Fund", "Institute", "Society", "Union", "Syndicate", "Limited"
or "Trust" (or abbreviations of like import) (&18-102).

Registered office, registered agent

Each limited liability company shall have and maintain in the State of Delaware:
- A registered office, which may but need not be a place of its business in
 the State of Delaware;
- A registered agent for service of process on the limited liability company,
 which agent may be either an individual resident of the State of
 Delaware whose business office is identical with the limited liability
 company’s registered office, or a domestic corporation, or a domestic
 limited partnership, or a domestic limited liability company, or a domestic
 business trust, or a foreign corporation, or a foreign limited partnership,
 or a foreign limited liability company authorized to do business in the
 State of Delaware having a business office identical with such registered
 office, which is generally open during normal business hours to accept
 service of process and otherwise perform the functions of a registered
 agent, or the limited liability company itself (&18-104a).

LLC Agreement
Limited liability company agreement is any agreement, written or oral, of the
members as to the affairs of a limited liability company and the conduct of its
business (&18-101.7).

Although each LLC agreement is unique, typically it includes following important

issues:
- Management matters (who will have authority and responsibility for
 managing the LLC, the management rights and duties of such person or
 persons, and the limitations or restrictions on such authority);
- The economic rights and duties of members, including the making of
 contributions to the entity, the right to receive allocations of profits and
 losses, and the timing of and restrictions on distributions by the entity to
 its members;
- All democracy rights and restrictions including voting rights and, if
 desired, the establishment of various classes or groups of members of
 managers having different rights, powers and duties;
- Matters relating to the issuance and transfer of interests in the entity, the
 admission and withdrawal of members, including substitute and additional
 members, and mandatory and no mandatory purchase of interests in the
 entity upon the occurrence of specified events, such as the death,
 disability, resignation or expulsion of a member;
- Matters relating to the term of the entity and its dissolution and
 winding-up.

A limited liability company agreement may be entered into either before, after or at
the time of the filing of a certificate of formation and, whether entered into before,
after or at the time of such filing, may be made effective as of the formation of the
limited liability company or at such other time or date as provided in the limited
liability company agreement (&10-210d).

MEMBERS

A person may be admitted to a limited liability company as a member of the limited

liability company in connection with the formation of a limited liability company and
after the formation of a limited liability company (&18-301a,b).
A limited liability company agreement may
- Provide for classes or groups of members having such relative rights,
 powers and duties as the limited liability company agreement may
 provide,
- Make provision for the future creation in the manner provided in the
 limited liability company agreement of additional classes or groups of
 members having such relative rights, powers and duties as may from
 time to time be established, including rights, powers and duties senior to
 existing classes and groups of members,
- Provide that any member or class or group of members shall have no
 voting rights,
- Grant to all or certain identified members or a specified class or group of
 the members the right to vote separately or with all or any class or
 group of the members, on any matter. Voting by members may be on a
 per capita, number, financial interest, class, group or any other basis,
- Set forth provisions relating to notice of the time, place or purpose of
 any meeting at which any matter is to be voted on by any members,
 waiver of any such notice, action by consent without a meeting, the
 establishment of a record date, quorum requirements, voting in person
 or by proxy, or any other matter with respect to the exercise of any such
 right to vote (§18-302).

No member of a limited liability company shall be obligated personally for any such
debt, obligation or liability of the limited liability company solely by reason of being a
member of the limited liability company. Under a limited liability company agreement
or under another agreement a member may agree to be obligated personally for any
or all of the debts, obligations and liabilities of the limited liability company (&18-
303a).
Except as provided in a limited liability company agreement, a member may lend
money to, borrow money from, act as a surety, guarantor or endorser for, guarantee
or assume 1 or more obligations of, provide collateral for, and transact other
business with, a limited liability company and, subject to other applicable law, has
the same rights and obligations with respect to any such matter as a person who is
not a member (&18-107).
A limited liability company agreement may provide that:
- A member who fails to perform in accordance with, or to comply with the
 terms and conditions of the limited liability company agreement shall be
 subject to specified penalties or specified consequences; and
- At the time or upon the happening of events specified in the limited
 liability company agreement, a member shall be subject to specified
 penalties or specified consequences (&18-306).

MANAGERS

Manager is a person who is named as a manager of a limited liability company in, or

designated as a manager of a limited liability company pursuant to, a limited liability
company agreement or similar instrument under which the limited liability company is
formed (&18-101.10).
If a limited liability company agreement provides for the management, in whole or in
part, of a limited liability company by a manager, the management of the limited
liability company, to the extent so provided, shall be vested in the manager who shall
be chosen by the members in the manner provided in the limited liability company
agreement. The manager shall also hold the offices and have the responsibilities
accorded to the manager by the members and set forth in a limited liability company
agreement. A limited liability company may have more than 1 manager. Unless
otherwise provided in a limited liability company agreement, each manager has the
authority to bind the limited liability company (&18-402).
A limited liability company agreement may
- Provide for classes or groups of managers having such relative rights,
 powers and duties as the limited liability company agreement may
 provide,
- Make provision for the future creation in the manner provided in the
 limited liability company agreement of additional classes or groups of
 managers having such relative rights, powers and duties as may from
 time to time be established, including rights, powers and duties senior to
 existing classes and groups of members,
- Provide for the taking of an action, including the amendment of the
 limited liability company agreement, without the vote or approval of any
 manager or class or group of managers, including an action to create
 under the provisions of the limited liability company agreement a class or
 group of limited liability company interests that was not previously
 outstanding,
- Grant to all or certain identified managers or a specified class or group
 of the managers the right to vote separately or with all or any class or
 group of the managers, on any matter. Voting by managers may be on a
 per capita, number, financial interest, class, group or any other basis,
- Set forth provisions relating to notice of the time, place or purpose of
 any meeting at which any matter is to be voted on by any manager or
 class or group of managers, waiver of any such notice, action by consent
 without a meeting, the establishment of a record date, quorum
 requirements, voting in person or by proxy, or any other matter with
 respect to the exercise of any such right to vote (§18-403).

A limited liability company agreement may provide that:

- A manager who fails to perform in accordance with, or to comply with
 the terms and conditions of, the limited liability company agreement shall
 be subject to specified penalties or specified consequences; and
- At the time or upon the happening of events specified in the limited
 liability company agreement, a manager shall be subject to specified
 penalties or specified consequences (&18-405).

Except as provided in a limited liability company agreement, a member or manager

may lend money to, borrow money from, act as a surety, guarantor or endorser for,
guarantee or assume 1 or more obligations of, provide collateral for, and transact
other business with, a limited liability company and, subject to other applicable law,
has the same rights and obligations with respect to any such matter as a person who
is not a member or manager (&18-107).

Except as otherwise provided by Delaware LLC Act, the debts, obligations and
liabilities of a limited liability company, whether arising in contract, tort or otherwise,
shall be solely the debts, obligations and liabilities of the limited liability company,
and no manager of a limited liability company shall be obligated personally for any
such debt, obligation or liability of the limited liability company solely by reason of
acting as a manager of the limited liability company. Under a limited liability company
agreement or under another agreement a member or manager may agree to be
obligated personally for any or all of the debts, obligations and liabilities of the limited
liability company (&18-303).
The manager of a limited liability company shall have the right to keep confidential
from the members, for such period of time as the manager deems reasonable, any
information which the manager reasonably believes to be in the nature of trade
secrets or other information the disclosure of which the manager in good faith
believes is not in the best interest of the limited liability company or could damage
the limited liability company or its business or which the limited liability company is
required by law or by agreement with a 3rd party to keep confidential (&18-305c).

FINANCE

The contribution of a member to a limited liability company may be in cash, property

or services rendered, or a promissory note or other obligation to contribute cash or
property or to perform services (&18-501).
The profits and losses of a limited liability company shall be allocated among the
members, and among classes or groups of members, in the manner provided in a
limited liability company agreement. If the limited liability company agreement does
not so provide, profits and losses shall be allocated on the basis of the agreed value
(as stated in the records of the limited liability company) of the contributions made by
each member to the extent they have been received by the limited liability company
and have not been returned (&18-503).
Distributions of cash or other assets of a limited liability company shall be allocated
among the members, and among classes or groups of members, in the manner
provided in a limited liability company agreement. If the limited liability company
agreement does not so provide, distributions shall be made on the basis of the
agreed value (as stated in the records of the limited liability company) of the
contributions made by each member to the extent they have been received by the
limited liability company and have not been returned (&18-504).

RECORDS

A limited liability company may maintain its records in other than a written form if
such form is capable of conversion into written form within a reasonable time (&18-
305d).

FEES

A fee in the amount of $50 shall be paid to and collected by the Secretary of State
for the use of the State of Delaware upon the receipt for filing of
A certificate of limited liability company domestication,
A certificate of transfer,
A certificate of conversion to limited liability company,
A certificate of formation,
A certificate of amendment,
A certificate of cancellation,
A certificate of merger or consolidation,
A restated certificate of formation,
A certificate of amendment of a certificate of merger or consolidation,
A certificate of termination of a merger or consolidation,
A certificate of correction, a certificate of restoration, or a certificate of revival (&18-
1105a3).

TAXATION OF LLC

For purposes of any tax imposed by the State of Delaware or any instrumentality,
agency or political subdivision of the State of Delaware, a limited liability company
formed under Delaware Limited Liability Company Act or qualified to do business in
the State of Delaware as a foreign limited liability company shall be classified as a
partnership unless classified otherwise for federal income tax purposes, in which
case the limited liability company shall be classified in the same manner as it is
classified for federal income tax purposes. For purposes of any tax imposed by the
State of Delaware or any instrumentality, agency or political subdivision of the State
of Delaware, a member or an assignee of a member of a limited liability company
formed under Delaware Limited Liability Company Act or qualified to do business in
the State of Delaware as a foreign limited liability company shall be treated as either
a resident or non-resident partner unless classified otherwise for federal income tax
purposes, in which case the member or assignee of a member shall have the same
status as such member or assignee of a member has for federal income tax
purposes (&18-1107a).
Every domestic limited liability company and every foreign limited liability company
registered to do business in the State of Delaware shall pay an annual tax, for the
use of the State of Delaware, in the amount of $100 (&18-1107b).
The annual tax shall be due and payable on the first day of June following the close
of the calendar year or upon the cancellation of a certificate of formation. If the
annual tax remains unpaid after the due date, the tax shall bear interest at the rate of
1 and one-half percent for each month or portion thereof until fully paid (&18-1107c).
A domestic limited liability company or foreign limited liability company that neglects,
refuses or fails to pay the annual tax when due shall cease to be in good standing as
a domestic limited liability company or registered as a foreign limited liability
company in the State of Delaware (&18-1107h).

REGISTRATION REQUIREMENTS

Description: Requirement:

Applicable Law Delaware Limited Liability Act

 Number of members One member or more

Number of managers Not required

Non-resident managers Not required

Corporate members Allowed

Paid up capital Not required

Bearer Shares Not available

Registered agent Required

Registered office Required

Annual report Not required

Audit Not required

Board of members meetings No restrictions on location

Information on beneficial owners Not available

Publicly available information Number and date of registration,

Registered office and agent, initial
members in case their names appear
on Certificate of Formation

REGISTRATION SET OF DOCUMENTS

Upon registration you will receive the following papers:

1."Certificate of Incorporation LLC"; duly apostilised (legalized/certified) in

 accordance with "Convention de La Haye du 5 Octobre 1961".
2."LLC Operating Agreement".
3."Statement of Actions", taken to organize the company.
4."Agreements on provision of nominee services", concluded between
 nominee entities and real beneficiary of company.
5."Resignation Letters", from nominee directors.
6."General Power of Attorney", issued to a real beneficiary.
7.Share certificates.
8.Corporate seal.